MICROWARE SYSTEMS CORP, 10-K, 1996-07-01

MICROWARE SYSTEMS CORP
10-K, 1996-07-01
PREPACKAGED SOFTWARE

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

(MARK ONE)

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended March 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

Commission file number 0-27988

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MICROWARE SYSTEMS CORPORATION
(Exact name of Registrant as specified in its charter)

---------------------------------

IOWA 42-1073196
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

1900 N.W. 114TH ST.
DES MOINES, IOWA 50325-7077
(Address of principal (Zip Code)
executive offices)

(515) 223-8000
(Registrant's telephone number, including area code)

Securities Registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common
Stock, no par value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past ninety days. Yes [ ] No [X]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be

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contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [X]

THE APPROXIMATE VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF JUNE 21, 1996 WAS $ 53,177,821.

NUMBER OF SHARES OUTSTANDING AS OF JUNE 21, 1996: 13,574,452.

Documents Incorporated by Reference - Portions of the Proxy Statement of the
Registrant to be filed no later than 120 days following March 31, 1996 are
incorporated by reference in Part III of this Report on Form 10-K.

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MICROWARE SYSTEMS CORPORATION

INDEX

Part I
Item 1. Business
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Submission of Matter to a Vote of Security Holders
Item 4a. Executive Officers of the Registrant

Part II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Item 6. Selected Consolidated Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures

Part III
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions

Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

Signatures

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PART I

CAUTIONARY NOTE:

IN ADDITION TO HISTORICAL FINANCIAL INFORMATION, THIS DISCUSSION OF THE
COMPANY'S BUSINESS AND OTHER ITEMS IN THIS ANNUAL REPORT ON FORM 10-K INCLUDE
FORWARD-LOOKING STATEMENTS ABOUT MICROWARE'S BUSINESS. THESE STATEMENTS SHOULD
ALL BE EVALUATED IN THE CONTEXT OF THE RISKS AND UNCERTAINTIES INHERENT IN
MICROWARE'S BUSINESS, INCLUDING THE LIKELY VARIABILITY OF THE COMPANY'S
QUARTERLY OPERATING RESULTS; SUCCESSFUL DEVELOPMENT OF THE DIGITAL TELEVISION,
WIRELESS COMMUNICATIONS AND OTHER EMERGING MARKETS AT WHICH THE COMPANY'S
PRODUCTS ARE TARGETED; THE COMPANY'S ABILITY TO SUCCESSFULLY MANAGE GROWTH AND
KEEP PACE WITH ITS COMPETITION AND WITH RAPID TECHNOLOGICAL CHANGE; THE RISK OF
MATERIAL LITIGATION RELATED TO THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS AND
LICENSES; AND OTHER FACTORS AS MENTIONED THROUGHOUT THIS FORM 10-K, IN THE
COMPANY'S FORM 8-K REPORT FILED ON APRIL 30, 1996, AND IN THE COMPANY'S
APRIL 2, 1996 PROSPECTUS FILED IN CONNECTION WITH ITS INITIAL PUBLIC OFFERING.

ITEM 1. BUSINESS

Microware Systems Corporation is a corporation organized under the laws of
the state of Iowa in 1977. Its principal executive offices are located at 1900
N.W. 114th Street, Des Moines, Iowa 50325-7077 (telephone number 515-223-8000;
Internet: [email protected] or http://www.microware.com). References elsewhere
in this Form 10-K to "Microware" or "the Company" are to Microware Systems
Corporation and its subsidiaries.

GENERAL DEVELOPMENT OF BUSINESS

Microware develops, markets and supports sophisticated real time operating
system software and development tools for advanced consumer and industrial
products. Microware's product line is built around its OS-9 real time operating
system, which was first introduced in 1980 and has been continually refined to
incorporate advances in technology. OS-9 has been used to develop numerous
applications for the industrial, scientific and telecommunications markets. In
addition, OS-9 is increasingly being used to run advanced consumer products such
as digital television decoders and wireless personal communications devices.

Historically, Microware licensed OS-9 and related tools for the development
of specialized real time applications by manufacturers of diverse "embedded
systems" such as industrial process control devices, scientific and medical
instrumentation, telecommunications equipment, and defense and aerospace
systems. An embedded system is a hidden computer -- a microprocessor and
related software dedicated to a specialized task, or set of tasks, embedded
within an application-specific industrial or consumer product. These tasks are
typically demanding and often require a real time operating system capable of
performing several simultaneous, immediate, predictable and reliable responses
to external events. For example, an embedded system that controls an
automobile's anti-lock braking system must react to external

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events such as pressure on the brake pedal, speed of the automobile and road
conditions, all within a fraction of a second.

In recent years the declining cost and increasing power of microprocessors
and memory and the improvement of client/server network systems have made it
possible and increasingly common for full-featured operating systems to be
embedded in a broad range of advanced communications products typically targeted
at higher-volume professional and consumer markets. These "smart products,"
including personal communications products such as next generation two-way
pagers, smart portable telephones, mobile and fixed Internet/intranet access
devices, personal/commercial mobile computing devices, and new media devices
such as digital television decoders, are emerging as a potentially large growth
area within the embedded products market. Microware has positioned itself,
through its investments in research and development and in strategic business
alliances, to benefit from these new opportunities in the embedded systems
market.

Microware believes that the architecture, capabilities and features of OS-9
- -- its full feature set, support for industry-leading processors, scalability,
modular architecture, and reliability -- are attractive to technological leaders
developing applications in these emerging smart products markets. The Company's
strategy is to use its technology and alliances with strategic customers such as
Motorola, Inc. ("Motorola") and IBM Corp. ("IBM") to grow its traditional
business and penetrate select emerging markets such as digital television and
wireless communications.

It should be noted that these emerging markets are at early stages and not
well-defined. Significant uncertainty exists regarding the economics of these
new services and products, for which demand is uncertain. There can be no
assurance that these markets will develop as planned, that Microware will be
able to successfully establish its products as standards within those markets,
or that Microware will continue to derive substantial revenues from those
markets.

NARRATIVE DESCRIPTION OF THE BUSINESS

PRODUCTS AND SERVICES

Microware offers a broad range of software products based on the OS-9 real
time operating system that can be configured to suit a range of applications in
a variety of industries. Substantially all of the Company's revenues are derived
from OS-9. Microware's products are designed for use with leading
microprocessors, including the Motorola 68xxx, Intel Pentium/x86, and
Motorola/IBM PowerPC families of processors. Ports to select new processor
architectures and families are currently in various stages of development.
Products for the Motorola 68xxx microprocessor family accounted for a
substantial amount of the Company's revenues in fiscal 1996. The Company also
provides engineering and training services to support its customers' development
efforts. The Company's products and services include the following:

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DEVELOPMENT LICENSES provide licensees the right to use a specific
configuration of OS-9 modules for internal product development. Typical
development licenses range from $4,000 for a base industrial OS-9 license to
$150,000 for a standard DAVID system license. Additional revenues may be
generated by adding additional modules and by licensing multiple processors and
products.

RUN-TIME LICENSES require licensees to pay Microware a royalty for every
copy of OS-9 deployed or shipped. The royalty is based on the module
configuration specified in the original development license and the cumulative
volume of copies shipped. Run-time licenses enable the Company to participate in
the customer's downstream revenues when the customer's product is successful in
the marketplace or deployed internally. Run-time licenses are typically granted
for a five-year period, and the Company may earn additional revenues through
license renewals. Development and run-time licenses are typically integrated in
a single OEM license.

DEVELOPMENT TOOLS are developed and sold by Microware to OS-9 licensees for
developing OS-9 applications. Most tools run on Microsoft Windows and popular
UNIX workstations, such as those manufactured by IBM, Sun Microsystems, Inc.,
Hewlett-Packard Company and Silicon Graphics, Inc., as well as on OS-9, and are
designed to reduce the cost and speed the development of OS-9 applications. The
operating system and development tools are well integrated and are updated on a
coordinated schedule. Customers therefore avoid potential incompatibility among
competing vendors. These development tools include:

- ULTRAC and ULTRAC++ COMPILERS, which provide high-level language
support for real time applications;

- SOURCE LEVEL DEBUGGER, which identifies the source of program
application errors during software testing;

- OS-9 UTILITY SET, which provides over 100 utilities to enhance
application development and execution;

- FASTRAK, which integrates the above tools with supporting functions
into a comprehensive automation, management and development environment;

- OS-9 DEVELOPER'S KIT, which allows programmers to develop embedded
OS-9 applications;

- OS-9 BOARD SUPPORT PAKS, which provide developers' versions of OS-9
configured for industry-standard hardware configurations; and

- DAVID DEVELOPER'S KIT, which contains additional utilities for
developing digital multimedia applications for digital television.

Development Tools are generally licensed under "shrink-wrap" terms on a
per-seat basis, with standard prices ranging from $7500 to $20,000.

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MAINTENANCE SUPPORT CONTRACTS provide updates of the licensed modules and
hot line technical support. The first-year maintenance fee is typically bundled
with the initial license fee. Thereafter customer support fees are paid
annually.

SERVICES cover a wide range of activities including consulting, custom
engineering, technical support and training. A high level of customer service
and support is essential because many of the Company's customers depend on the
Company's products to support the development and operation of complex
applications. Custom engineering revenues are typically from discrete software
engineering projects adapting OS-9 to specific customer requirements. The
Company also selectively engages in custom development in order to extend its
product line.

MARKETS, APPLICATIONS AND CUSTOMERS

Microware's strategy is to leverage its advanced technology, strategic
customer relationships, commitment to quality, and expertise based on years of
experience in the embedded systems market to expand its business from developing
specialized applications for a diverse group of manufacturers to embedding OS-9
in high volume intelligent products. The key elements of this strategy are to
establish OS-9 as the operating system of choice in target markets, to grow its
traditional business and to sustain Microware's technological advantages. There
can be no assurance that any elements of the Company's strategy will be
realized, that the markets targeted by the Company will grow as expected, or
that the Company will be able to generate significant revenues or earnings from
its efforts.

CORE BUSINESS

The Company's core business is in the traditional real time embedded system
software market. The Company has hundreds of licensees of standard OS-9
configurations for traditional embedded systems applications. Process control
and factory automation applications remain a key area of emphasis. Emerging
markets for the Company's core business include automotive, home automation,
intelligent transportation systems, office automation and medical
instrumentation. The Company has historically derived the majority of its
revenues from development licenses and run-time license fees along with sales of
related software development tools, support and custom contract engineering work
for its core business customers. The Company believes that the market for
operating software in its core business is large and diversified, and continues
to actively develop, market, support and license its products to and for
customers in the traditional core embedded systems markets. Microware believes
that it has a substantial share of the third party embedded operating system
market.

Looking forward, the Company intends to exploit a number of industry trends
to grow its core business. One important trend is the wider availability and
decreasing cost of more powerful microprocessors, particularly 32-bit
microprocessors, for which Microware has optimized

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most of its core products. This trend is expanding the universe of products in
which embedded systems are used and increasing the amount of software used in
those applications. The Company believes this increase in power, software, and
memory footprint makes Microware's full-featured operating system solution more
attractive to embedded designers who were previously more focused on size than
functionality in their design decisions.

Additionally, increased time-to-market pressures and other factors are
driving manufacturers away from in-house software solutions and general purpose
operating systems such as DOS and UNIX to standard real time operating
environments like Microware's, which offer them an integrated package of
standardized operating systems, modular enhancements, and development tools.
Microware believes this movement to third-party software will result in the
selection of integrated, enterprise-wide solutions by many manufacturers and
drive a market consolidation around those real-time embedded systems vendors
able to provide full operating environment solutions and related sales and
technical support.

Microware intends to capitalize on these trends to expand its core
business, focusing in particular on the development of new markets for "smart
products" -- networked devices based on advanced processors targeted at high
volume consumer and commercial customers. The Company's ability to capitalize
on these trends is subject to risks and uncertainties, including the increasing
levels of competition in the embedded systems software market and Microware's
ability to keep pace with the rapid technological change required by the market,
particularly in the continued addition of support for popular new processors and
programming environments.

NEW MEDIA BUSINESS

Microware began expanding its core operating system technology into new
media products in 1985 when it partnered with Philips Electronics N.V. and Sony
Corporation to develop a new consumer multimedia format -- Compact
Disc-interactive. CD-i integrates text, data, graphics, audio and video on a
single compact disc, allowing consumers to access multimedia presentations on a
standard television using an OS-9 based CD-i player and an infrared remote
control.

In 1993 Microware leveraged its early multimedia experience to develop a
new operating system configuration targeted at the emerging digital television
business -- DAVID. Digital television represents a new market opportunity for
the Company, driven by the worldwide deployment of new telecommunications
networks - ranging from currently available digital broadcast satellite ("DBS")
networks to the fully interactive broadband client/server networks under
development by certain regional telephone companies. In the immediate term,
these networks will provide higher quality digital video and audio, increased
channel capacity, and more user options for one-way conditional access
programming such as premium channels and pay-per-view. In the long term, as
broadband networks develop, a wide array of interactive services are expected,
such as Internet access, video on demand, home shopping,

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gaming, information retrieval, and video mail. DAVID is designed to operate the
digital decoders that turn standard televisions into smart clients on these
networks with interactive processing, graphics, video and audio functionality.
This decoder can be an external device ("set-top box") or embedded within the
television.

DAVID has emerged as a standard operating system for digital decoders,
having been licensed by over 20 set-top box manufacturers and used in trial
deployments around the world. A critical element of the DAVID software is its
modular architecture, which allows components to be added and removed
dynamically over a network while the operating system is running. DAVID's
scalable architecture and efficient system software enable operators to add
digital features to already-deployed DAVID set-top boxes at an acceptable
incremental cost.

Manufacturers can license and deploy streamlined configurations of DAVID
today which can be upgraded as network infrastructures develop and the desired
levels of interactivity and related functionality increase. Microware believes
this is especially important for manufacturers and network operators who wish to
improve network capacity and service incrementally as the underlying
technologies develop and consumer demand grows.

In response to apparent market demand for upgradeable decoder technology,
Microware introduced DAVIDlite in November 1995. DAVIDlite is a streamlined
configuration of DAVID targeted at digital-video broadcast products for existing
cable systems, new multichannel multipoint distribution systems ("MMDS") and DBS
networks. Content and hardware developed using DAVIDlite will be fully
compatible with DAVID-based broadband systems. While the Company hopes to
license DAVIDlite for use in DBS, MMDS and digital cable deployments currently
underway, the product is new and Microware has yet to derive substantial
revenues from DAVIDlite.

To date, most of the Company's new media revenues have been from DAVID
license agreements and custom contract engineering with digital decoder
manufacturers. The Company's current activities relating to its new media
markets remain focused upon licensing DAVID and DAVIDlite for digital television
uses. There can be no assurance that the Company will be able to sustain
development license revenues at their current levels, that the Company will
receive substantial run-time license revenues from any digital television
industry participant, or that the Company will be able to establish and maintain
DAVID as an industry standard.

The digital television marketplace is complex and dynamic, and development
of Microware's new media business involves marketing the DAVID solution as a
standard for third parties who develop and procure network technology (such as
digital decoders), content and service. For example, Microware must work closely
with digital television network operators (primarily large telephone and cable
companies) to promote their specification of DAVID as the standard operating
system solution for use in their network trials and deployments. Increasingly,
network operators are establishing cooperative ventures to aggregate content and

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technology for their digital television networks. Examples include TELE-TV, a
partnership of Bell Atlantic, Nynex Corp., and Pacific Telesis; and Americast, a
joint venture of Ameritech, Bell South, GTE, SBC Communication Inc. and the Walt
Disney Company. Microware actively markets DAVID-based solutions to these new
entities.

Development of Microware's new media business also requires the development
and promotion of complementary products by the manufacturers of network servers
and authoring tool developers. While these third party relationships with
network operators, server manufacturers, and authoring tool vendors are
important to promote new media product licensing by decoder manufacturers, and
the Company is currently developing and marketing products directed at these
entities, there can be no assurance that Microware will derive substantial
licensing or service revenue directly from these third parties.

Microware has become a member of various industry standard-setting bodies
to ensure its new media products are compatible with emerging public standards,
including the following organizations: (i) the Digital Audio-Video Digital
Council ("DAVIC"), an international body developing interoperability standards
for set-top boxes; (ii) the Digital Storage Media Command & Control Committee,
an ISO subcommittee working on digital television networking standards; and
(iii) the Digital Multimedia Association, a trade association. The Company also
sponsors an annual DAVID Developers Conference, the most recent of which was
held in September 1995 and was attended by over 1,000 participants.

Despite the announced intentions of many companies, and the Company's
belief that DAVID is well positioned as a standard for the digital television
market, the Company believes the digital television market is at a very early
stage and is not well defined. Many prominent deployments have been delayed,
and there can be no assurance that the digital television market will develop in
any predictable or immediate way. There is significant uncertainty about the
economics of delivering such services, including the willingness of consumers to
pay for digital television and the profitability of these services. Furthermore,
many of the announced intentions involve architectures, operating systems and
hardware which are proprietary to the parties involved and which could compete
or conflict with each other and with the Company's digital television strategy.
It is therefore difficult to make reliable estimates of the size of the digital
television market or the Company's likely market share.

WIRELESS PERSONAL COMMUNICATIONS BUSINESS

Microware is developing new configurations of its operating systems to
serve the wireless personal communications market by leveraging the Company's
investment in OS-9 and DAVID. These systems combine selected OS-9 and DAVID
modules with software modules created for key wireless functions such as power
management, which is critical to allow personal communications devices to obtain
longer battery life.

The existing wireless personal communications market includes a

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number of segments, each with different applications and economics. At the low
end, numeric and alphanumeric pagers offer limited functionality -- one-way
services such as short messages, periodic news, weather, sports and stock
updates. More recently developed two-way pagers offer only simple message
acknowledgment features, but have demonstrated the feasibility of two-way
messaging. Current high-end personal communications products such as Apple's
Newton to date have had a limited consumer market appeal due to their relatively
high cost, low battery life, large size and difficulty of use.

Microware believes there is a substantial market opportunity for devices
combining the small size and low cost of pagers with the more advanced
interactivity and computing power of personal digital assistants ("PDAs"), and
for specialized mobile communications devices tailored for specific consumer and
professional markets. The Company believes OS-9 is well suited to operate such
devices, as well as new generations of more advanced cellular telephones. Many
of these devices are expected to provide mobile access to the Internet and
private "intranet" networks.

Microware's wireless strategy is to provide a wide variety of products and
services for licensing to leading wireless equipment manufacturers. Microware
has been developing wireless versions of its OS-9 operating system since 1991,
when the Company developed a customized configuration of OS-9 for cellular
telephones manufactured by AEG Mobile Communication GmbH. During the past fiscal
year, Microware developed strategic customer relationships with wireless
technology groups within Motorola and IBM. Microware has recently licensed OS-
9 to certain other manufacturers for the development of next generation wireless
devices.

In July 1995, Microware executed a software development and license
agreement with the Paging Products Group of Motorola to develop a new wireless
operating environment based on OS-9 and Motorola's wireless software protocols
for use in certain existing and next generation Motorola wireless personal
communications devices. Under the agreement, Motorola will be able to sublicense
the technology subject to royalty payments to Microware. In addition to
recognizing up-front development fees, Microware will receive a royalty for each
device containing a copy of the operating system sold by Motorola or its
sublicensees. In July 1995, Motorola also purchased 1,526,232 shares of
Microware Common Stock and warrants to purchase 1,803,728 additional shares over
the next five years.

In May 1996, Motorola announced the formation of a new Platform Software
Division within the Messaging, Information and Media Sector dedicated to
promoting this jointly developed OS-9-based operating environment as a common
operating environment for the wireless communications industry.

IBM has entered into a license and development agreement with Microware to
port OS-9 to certain PowerPC microprocessors for use with PDAs and other
networked devices. Microware will receive development revenues for this work.
Upon deployment, the Company expects to receive

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a royalty for each copy of OS-9 distributed as part of any IBM product.

The Company is undertaking a number of development activities to support
its strategy in the personal communications market. In addition to the power
management protocols discussed above, the Company is developing narrow-band
radio frequency protocol support and adapting its MAUI graphical user interface
protocols to the requirements of wireless devices. It is also adding Internet
product enhancements such as Java support to enable its wireless customers to
develop hand-held Internet/Intranet access devices.

During the past fiscal year, the Company's revenues from its wireless
activities primarily consisted of development license and custom contract
engineering fees received from wireless customers. The Company's future
operating results will depend significantly on the development of its products
and personal wireless communication devices. While the wireless communications
market is established, the Company's strategy depends on the incorporation of
the Company's software into new products, such as two-way pagers and PDAs, for
which demand is speculative. There can be no assurance that such products will
be successfully developed or commercialized or that the Company will derive
significant revenues or earnings from such products.

INTERNET PRODUCTS

In all aspects of its business, Microware is expanding its Internet product
offerings to enable OEMs to offer consumers Internet access through intelligent
devices. Microware has supported standard Internet protocols such as TCP/IP
through its Internet Support Pak since 1989. The Company's effort to expand
Internet support began in February 1996, when Microware licensed the Java-TM-
programming language and HotJava-TM- browser from Sun Microsystems, Inc. Java
has achieved wide market acceptance as a programming language which allows
software developers to write applications which will be interoperable across any
Java-compatible client/server platform. The Company is porting Java to OS-9 and
DAVID, to ensure all of Microware's OEM licensees will be able to supply their
customers with Java-compatible smart products operating on OS-9 or DAVID.

In April of 1996, Microware entered into a joint development and licensing
agreement with Spyglass, Inc. ("Spyglass") for Spyglass' Web Technology Kit
("WTK"). Under this agreement, Spyglass will port its Internet browser software
to Microware's OS-9 and DAVID platforms. Microware will sublicense the
resulting Spyglass Web Technology Kit for OS-9/DAVID directly to its customers.
Microware believes Spyglass's World Wide Web technology is well-suited
for the smart products markets Microware is targeting, because it is modular and
scalable, allowing varying levels of functionality to be added or removed as
desired for a given application. This modularity also complements OS-9/DAVID's
similar characteristics.

With the integration of Java support and Spyglass browser technology into
its product lines, Microware believes it is able to

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provide Internet connectivity to its new media, wireless communications, and
traditional core embedded systems customers. A number of customers, including
Hongkong Telecom IMS Ltd. and a major television manufacturing company, have
already licensed Internet OS-9/DAVID software packages from Microware.

While Microware believes there is substantial demand among embedded systems
designers for licensing of leading Internet technology in conjunction with real
time operating system software such as OS-9 and DAVID, there are substantial
risks and uncertainties associated with the Company's Internet efforts. Most of
the Company's new Internet product enhancements are licensed from third parties
under restrictive license agreements requiring the payment of royalties. There
can be no assurance that the terms of those licenses will be adequate to enable
Microware to provide its customers with satisfactory terms and conditions for
those products, or that additional products desired by customers will be
available for licensing in the future. Significant uncertainty remains about
the commercial viability of the Internet, and there can be no assurance that the
current level of demand for Internet products among embedded systems designers
will continue.

TECHNOLOGY

OS-9 OPERATING SYSTEM

OS-9 is a full-featured, multitasking, real time operating system that goes
beyond the base features that are generally provided by the simple task-
switching software traditionally used in embedded systems. OS-9 currently is
configured for the Motorola 68xxx, Intel X86/Pentium, and Motorola/IBM PowerPC
microprocessor and microcontroller families. Ports to select new processor
architectures and families are currently in various stages of development.

The OS-9 kernel provides prioritized round-robin timeslicing for any number
of tasks, real time preemptive task switching and comprehensive memory
management for multiple memory classes. OS-9 has a modular architecture which
allows system component modules to be added and removed dynamically, even while
the operating system is running. OS-9 provides an application execution
environment and I/O subsystem similar to UNIX.

A key advantage of OS-9 is its highly reliable memory protection. Embedded
systems used in consumer products and mission critical applications must detect
and handle system errors in a controlled and predetermined way. The file system
design is ruggedized to inhibit data loss in the event of power failure or
catastrophic system faults. This is particularly important for new generations
of mass-market, intelligent products.

EXPANSION MODULES

The OS-9 family contains an extensive library of specialized I/O subsystem
plug-in modules for OS-9 which may be licensed as required by

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the functional requirements of specific customer hardware configurations. These
add-on modules include networking support (Internet support, interoperability
protocols, infrastructural compatibility such as ATM and ISDN), multimedia
functionality (graphical user interface protocols, MPEG support, graphics file
managers), advanced communications protocols (serial packet support,
interprocess communications), and memory storage support. Microware also offers
pre-packaged versions of the OS-9 kernel bundled with selected expansion modules
for specific applications including: OS-9 System Developer Kits; Board Support
Packages for popular VME, ISA and other bus-oriented computer systems; DAVID for
digital television; and CD-RTOS for CD-i players.

Additional modules under development by Microware include narrowband RF
communications and advanced power management protocols.

Microware is also adding diverse third party support to complement its
proprietary expansion modules. Third party support currently available or under
development includes Java-TM- support and HotJava-TM- browser, the Spyglass Web
Technology Kit, PCMCIA support (SystemSoft Corp.), and Communications Security
(RSA).

In April 1996 Microware entered into a master license agreement with
SystemSoft Corp. ("SystemSoft"), an industry leading provider of PCMCIA support
software. PCMCIA support was developed principally for the portable personal
computer market to allow end-users to add specialized application functionality
by plugging a separate card embodying that functionality into the PC or other
device they are using. Manufacturers of smart products such as portable
wireless communications devices are increasingly demanding PCMCIA support for
their products.

Under Microware's agreement with SystemSoft, SystemSoft has ported its
PCMCIA software to OS-9 and DAVID. Microware will be able to sublicense the
resulting PC Card Support for OS-9/DAVID directly to its customers.
Additionally, Microware will be the exclusive licensee of SystemSoft's PCMCIA
technology (excluding previously existing licenses) for the embedded systems
market for a minimum period of one year, which may be extended.

DEVELOPMENT TOOLS

The Company produces several development tools and packages. UltraC allows
designers of complex real-time systems to precisely control code generation and
optimization on a local basis for either speed or code size, and is designed to
be quickly re-configured for any modern 32-bit or 64-bit microprocessor. A C++
version of Ultra C was introduced during the past year.

FasTrak utilizes contemporary point-&-click and drag-&-drop user interface
techniques to integrate OS-9 development tools into an integrated software
development environment. Automation features handle routine software development
activities and support administrative functions, such as group project
management and quality assurance.

<PAGE>

SOFTWARE DEVELOPMENT QUALITY ASSURANCE

The reliability of Microware's technology is reflected in and supported by
the Company's software development methodologies. Microware believes that it is
the first real time embedded systems software developer in the world to be
certified under the International Standards Organization's ISO 9000 quality
standard. Microware's ISO 9001 certification by Underwriter's Laboratories helps
ensure that the processes by which new products are developed are well defined
and internally monitored for quality. The ISO certification is audited at least
annually, and the failure to maintain the certification could have an adverse
effect on the Company's business.

MARKETING, SALES AND DISTRIBUTION

Microware markets and licenses its core and wireless communications
products principally through its direct sales force, and through one independent
distributor. In the United States and Canada, the Company sells its core
products through a direct sales force of 12 personnel located in Campbell,
California; Chicago, Illinois; Austin, Texas; Hampton Falls, New Hampshire;
Aurora, Ohio; Norcross, Georgia; and Des Moines, Iowa. The Company's direct
sales force is supported by 10 sales and marketing personnel located in Des
Moines, Iowa. The Company also has a number of other independent authorized
distributors. During April 1995, the Company reorganized its marketing and sales
staff for core products to target higher value-added opportunities. It has
developed new sales tactics to increase the efficiency of its sales force, and
has set new sales goals and profit targets focused on pursuing new licensing
opportunities. Routine sales of tools, maintenance, upgrade, license extensions
and other ancillary products have been moved to an in-house telemarketing group.

In Japan, France and the United Kingdom, the core and wireless products are
sold through the Company's sales and service subsidiaries, consisting of 13, 2
and 5 sales representatives, respectively. The Company also licenses its core
products through an independent distributor located in Germany. The distributor,
Dr. Rudolf Keil GmbH, has non-exclusive distribution rights for core products in
Germany. International sales accounted for approximately 63%, 68%, and 67% of
revenues in fiscal years 1994, 1995, and 1996, respectively. See note 10 of
the Notes to the Consolidated Financial Statements.

The Company's new media products are sold through a strategic sales and
marketing organization consisting of 15 personnel.

As the Company enters new vertical markets, it intends to modify its sales
process from a technically-oriented approach to a relationship-oriented
approach. As a part of this strategy, the Company intends to establish
geographically dispersed competency centers, to better build and maintain
customer relationships. The first two centers opened in fiscal year 1996 in the
San Francisco and Boston areas. These

<PAGE>

centers are staffed by business development and engineering specialists.

Some of Microware's wireless products are expected to be distributed
through Motorola's sales and distribution network. Under the Motorola Agreement,
Motorola may distribute certain mass market products incorporating OS-9, for
which Microware would receive per copy royalties. Motorola may also act as
a distributor of Microware's development tools for the wireless market. In May
1996, Motorola announced the formation of a new Platform Software Division
within the Messaging, Information and Media Sector dedicated to promoting
Motorola's OS-9 based wireless communications operating system as an open
software platform for the wireless industry.

The Company provides technical support in the United States through its
home office in Des Moines, Iowa and through field engineers. Technical support
outside of North America is provided by the Company's staff of support engineers
located at four sites, three in Europe and one in Asia/Pacific. Distributors and
original equipment manufacturers generally offer first level customer support to
their end-user customers and rely on the Company for additional support. The
Company also selectively engages in custom development activities related to
extension of its product line.

The Company generates new business opportunities in its target markets
through advertising, trade shows, user group meetings, telemarketing, direct
mail and through its strategic alliances. Microware is also active in various
industry standard bodies, including the American National Standards Institute
("ANSI"), IMA, DAVIC, and DSMCC. In addition, Microware believes that its ISO
9001 certification gives the Company a marketing advantage, especially in
international markets.

COMPETITION

The embedded software industry is highly competitive and is characterized
by rapidly advancing technologies. To maintain or improve its position, the
Company must continue to enhance its current product offerings and introduce new
product features and extensions in a timely fashion.

The Company's core and wireless communications products compete with
proprietary software developed internally by embedded system product
manufacturers, as well as with many third party vendors of development tools for
embedded systems, including many privately held companies and several publicly
held companies. Several microprocessor manufacturers, including Intel and
Motorola, distribute software that at times compete with the Company's products.
The Company expects that additional competitors, including other large software
vendors, will emerge. Some of the Company's current competitors, and many of the
Company's potential competitors, have substantially greater technical, sales,
marketing and financial resources than the Company. Other than proprietary
software developed internally by embedded systems manufacturers, the Company's
core and wireless products compete

<PAGE>

primarily with products by Integrated Systems, Inc. ("ISI"), Mentor Graphics
Corp. (through its acquisition of Microtec Research, Inc.) and Wind River
Systems, Inc. ("Wind River").

In the new media market, the Company's digital television decoder products
compete primarily with software developed internally by set-top box
manufacturers, including Scientific-Atlanta's PowerTV and Thomson Consumer
Electronics' TV Open. Many of the Company's new media competitors have
substantially greater technical, sales, marketing and financial resources than
the Company. However, the Company believes DAVID's technological advantages and
position as an industry standard counterbalance those resources.

The Company expects that as the digital television, wireless personal
communications, and other emerging embedded systems markets evolve, additional
competitors may seek to enter these markets.

The Company believes that its ability to effectively compete in its core,
wireless and new media markets depends on factors both within and outside its
control, including timing and success of new products developed by the Company
and its competitors, product performance and price, distribution and customer
support, product reputation, customers' willingness to replace internally
developed software solutions and customers' assessment of the Company's
financial resources and its technical and service expertise. The Company
believes that it competes effectively in its markets on the basis of product
features and reliability, price performance characteristics, reputation,
worldwide infrastructure, support services, sales and marketing strength and
financial stability. There can be no assurance that the Company will be able to
compete successfully with respect to these and other factors. In particular,
competitive pressures, including pricing pressures for the Company's run-time
licenses and new product introductions from existing and new competitors could
adversely affect the Company's business and results from operations.

RESEARCH AND DEVELOPMENT

The Company has made substantial investments in product development. The
Company believes that its future success will depend in large part on its
ability to enhance its existing products, develop new products and maintain its
technological competitiveness. As of March 31, 1996, the Company employed 101
product development engineers. Of these, 87 engineers were based in Des Moines,
Iowa and 14 were based in Tokyo, Japan.

During fiscal 1994, 1995, 1996 research and development expenses amounted
to $4.8 million, $5.6 million, and $5.0 million, respectively, excluding
capitalized software development costs. For the above periods, research and
development expenses represented 31.9%, 29.9% and 21.2% of the Company's total
revenues, respectively. For the same periods, software development costs
capitalized totalled $300,000, $204,000, and $150,00, respectively. The Company
believes that its recent and current level of research and development expenses
is adequate to meet its competitive needs. The Company anticipates that it will
continue to

<PAGE>

commit substantial resources to product development in the future.

PROPRIETARY RIGHTS

The Company's success is dependent upon its proprietary technology and
products. The Company regards its software as proprietary and, to date, the
Company has relied principally upon copyrights, trademarks, trade secrets and
contractual restrictions to protect its proprietary technology. The Company
currently has no patents, but has four U.S. patent applications pending relating
to the Company's new media technology. The Company generally enters into
confidentiality agreements with its employees and confidentiality and license
agreements with its distributors, customers and potential customers, and limits
access to and distribution of the source code to its software and other
proprietary information. End-user licenses of the Company's software are
sometimes in the form of shrink-wrap license agreements, which typically are not
signed by licensees and therefore may be unenforceable under the laws of many
jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to the same extent as do the laws of the United
States. Accordingly, despite precautions taken by the Company, it may be
possible for unauthorized third parties to copy certain portions of the
Company's technology or to obtain and use information that the Company regards
as proprietary. There can be no assurance that the steps taken by the Company
will be adequate to prevent misappropriation of its technology or to provide an
adequate remedy in the event of a breach by others.

Certain technology used in the Company's products, including Java and
HotJava support, the Spyglass Web Technology Kit, and SystemSoft PC Card support
software, is licensed from third parties. These licenses generally require the
Company to pay royalties and to fulfill confidentiality obligations. In the
future, it may be necessary or desirable for the Company to seek additional
licenses of intellectual property rights held by third parties. There can be no
assurance that such licenses will be available or, if such licenses are
available, that the terms thereof will not have a material adverse effect on the
Company's business, financial condition and results of operations.

There has been substantial industry litigation regarding intellectual
property rights of technology companies. Although the Company is not aware of
any infringement by its products of any patents or proprietary rights of others,
patent and copyright protection for software is still a developing area of law
and increased visibility of the Company and its products could provoke claims of
infringement from third parties. The Company has agreed to indemnify its
customers for liability incurred in connection with the infringement of a third
party's intellectual property rights, including patents. In the future,
litigation may be necessary to enforce and protect trade secrets and other
intellectual property rights owned by the Company. The Company may also be
subject to litigation to defend the Company against claimed infringement of the
rights of others or to determine the scope and validity of the proprietary
rights of others. Any such litigation could be costly and cause diversion of
management's attention, either of which could have a material adverse effect on
the Company's results of

<PAGE>

operations and financial condition. Adverse determinations in such litigation
could result in the loss of the Company's proprietary rights, subject the
Company to significant liabilities, require the Company to seek licenses from
third parties or prevent the Company from manufacturing or selling its products,
any one of which could have a material adverse effect on the Company's business,
financial condition and results of operations. Furthermore, there can be no
assurance that any necessary licenses will be available on reasonable terms, or
at all.

PRODUCTION

The Company prepares master software media, user manuals and packaging for
each product. The Company's media duplication, as well as its product packaging,
is performed by the Company at its facilities throughout the world, while
printing of user manuals and related materials is performed by the Company or by
outside sources in both the United States and Japan. The Company grants
duplication rights to certain of its original equipment manufacturers. To date,
the Company has not experienced any material difficulties or delays in
production of its software products or documentation.

BACKLOG

The Company generally ships its products within a few days after acceptance
of a customer purchase order and, therefore, has insignificant product backlog.
The low product backlog makes it difficult to predict with accuracy quarterly
revenues and quarterly earnings prior to the end of a quarterly reporting
period. Contract engineering services backlog, consisting of orders for specific
engineering services and maintenance support to be performed within the
following 12 months, was approximately $4,274,000 as of March 31, 1996 and
approximately $3,258,000 as of March 31, 1995.

EMPLOYEES

As of March 31, 1996, the Company employed 210 people, including 59 in
marketing, sales and support services, 101 in engineering and product
development and 50 in operations, finance and administration. Of these
employees, 157 are located in the United States, and 53 are employed by the
Company's subsidiaries in the United Kingdom, France and Japan. None of the
Company's employees is represented by a labor union or is the subject of a
collective bargaining agreement. The Company has never experienced a work
stoppage and believes that its employee relations are good.

NOTICE REGARDING TRADEMARKS

Microware, OS-9, and DAVID are registered trademarks of Microware Systems
Corporation. The Microware logo, MAUI, UpLink, ITEM, FasTrak, Ultra C, and
Ultra C++ are trademarks of Microware Systems Corporation. Java and HotJava are
trademarks of Sun Microsystems, Inc. Spyglass is a trademark of Spyglass, Inc.
SystemSoft is a registered trademark of SystemSoft Corp. All other marks are
trademarks or registered trademarks of their respective holders.

<PAGE>

ITEM 2. PROPERTIES

The Company owns its main operating facility located in Des Moines, Iowa,
subject to mortgage debt. This space is used for research and development, sales
and marketing, operations and administration and consists of approximately
28,000 square feet. Annual mortgage payments for the Company's main operating
facility total approximately $144,000. Effective October 10, 1995, the Company
entered into a one-year lease agreement for additional office space of
approximately 12,500 square feet in Des Moines, Iowa to support the overall
growth of the Company. Annual rent for this office space is approximately
$192,000. The Company also leases under cancellable terms approximately 7,500
square feet in Tokyo, Japan for an annual rental payment of approximately
$564,000. The Company also leases 11 domestic and international sales and
support offices for an aggregate annual rental payment of approximately
$345,000. The Company believes that additional space will be available as
needed.

The Company is currently planning to consolidate its Des Moines
operations into a new corporate headquarters facility near its current
headquarters. On May 9, 1996, the Company purchased approximately 17.5 acres
of land for approximately $2.1 million in cash, on which the Company
currently expects to construct a new office building accommodating
approximately 88,000 square feet of office space at a cost estimate of $9
million (including associated land). The Company is currently in the process
of negotiating the initial construction contracts and finalizing the cost and
financing arrangements. In April, 1996, the Company entered into a
Development Agreement with the City of Clive, Iowa, pursuant to which the
City will refund to Microware over the next 10 years 100 percent of the
property taxes attributable to Microware's improvement of the property. The
City has also approved the rezoning and development plans for Microware's
project. The Company expects to finalize its plans and begin construction of
the new facility during the current fiscal year. There can be no assurance
that the Company will successfully complete the project within budget, that
the Company will be able to sell its existing headquarters facility at a
price in excess of its current investment, that the Company will later be
able to sell any portions of its newly purchased land at a price in excess of
the purchase price, or that the move will not disrupt the Company's
operations or affect the Company's operating results over the near term.

The following table shows the location and approximate square footage of
the Company's leased facilities as of March 31, 1996.

LOCATION APPROXIMATE SQUARE FOOTAGE
-------- --------------------------
West Des Moines, Iowa 12,500
Urbandale, Iowa 7,000
Campbell, California 3,100
Newton, Massachusettes 1,200
Santa Monica, California 200
Oak Brook, Illinois 150
Austin, Texas 200
Tokyo, Japan 7,500

<PAGE>

Burnham, England 4,000
Meyreuil, France 5,000
Paris, France 140
Amsterdam, The Netherlands 220

<PAGE>

ITEM 3. LEGAL PROCEEDINGS

The Company is not a party to any material litigation and is not aware of
any pending or threatened litigation that would have a material adverse effect
on the Company or its business.

<PAGE>

ITEM 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS

At a Special Meeting of Shareholders held on March 11, 1996, the Company's
shareholders adopted Restated and Amended Articles of Incorporation and new By-
Laws, which were effective as of the closing of the Company's Initial Public
Offering on April 9, 1996. The votes on the issues were as follows:

1. Adoption of Restated and Amended Articles of Incorporation

Voting Group shares o/s and entitled to vote votes at meeting votes for/against
<S> <C> <C> <C>
Common 2,552,613 2,350,061 2,348,161/1,900
Series A
Preferred 340,000 338,310.4 338,310.4/0
</TABLE>

2. Adoption of Revised By-Laws

Voting Group shares o/s and entitled to vote votes at meeting votes for/against
<S> <C> <C> <C>
Common 2,552,613 2,350,061 2,348,161/1,900
Series A
Preferred 340,000 338,310.4 338,310.4/0
</TABLE>

<PAGE>

ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT

The executive officers of the Company are as follows:

NAME AGE POSITION
---- --- --------
Kenneth B. Kaplan 43 President and Chief Executive Officer
George J. Barry 42 Executive Vice President, Treasurer and Chief
Financial Officer
Lawrence A. Crane 42 Executive Vice President and Secretary
Charles R. Ball 37 Executive Vice President
Michael J. Burgher 43 Executive Vice President
Steven L. Johnson 35 Executive Vice President

Mr. Kaplan has been Chairman of the Board of Directors, President and Chief
Executive Officer of the Company since it was founded in 1977. Mr. Kaplan was
one of the principal designers of the OS-9 real time operating system.
Mr. Kaplan is a member of the board of directors of the Interactive Multimedia
Association and is a Trustee of Drake University and Buena Vista University.
Mr. Kaplan attended Drake University.

Mr. Barry joined the Company in January 1995 as Executive Vice President,
Treasurer and Chief Financial Officer. Prior to joining the Company, from 1993
through 1994, Mr. Barry was Vice President and Chief Financial Officer of
Comptek Research, Inc., a technology-based military contractor. In 1992,
Mr. Barry was Vice President of Commercialization for Kansas Technology
Enterprise Corporation, an affiliate of the University of Kansas System, and
from 1986 until 1992, Mr. Barry was a Group Chief Financial Officer/Controller
of Dynatech Corp., a high technology company. Mr. Barry is a CPA and holds an
MBA from the University of Wisconsin - Madison.

Mr. Crane joined the Company in 1978 and was one of the principal designers
of the OS-9 real time operating system. Mr. Crane has been Vice President and
director since 1981, Secretary since 1987 and became an Executive Vice President
in September 1995. Mr. Crane advises on the design and development of many of
the Company's products and coordinates the Company's advanced research efforts.
Mr. Crane holds a B.S. degree in Computer Science from Drake University.

Mr. Ball joined the Company in 1981 as a technical sales representative,
was elected a Vice President in 1985 and became an Executive Vice President in
September 1995. Mr. Ball became a director of the Company in 1983. Mr. Ball is
currently General Manager of International Operations. Mr. Ball holds a B.G.S.
degree from Drake University.

Mr. Burgher joined the Company in 1987, was elected Vice President in 1992
and became an Executive Vice President in September 1995. Mr. Burgher is
currently General Manager of the Company's Core Technologies division. Prior to
joining the Company, Mr. Burgher worked for Control Data Corporation, a computer
services company. Mr. Burgher holds a B.A. degree in Political Science from
Drake University.

<PAGE>

Mr. Johnson joined the Company in 1987, was elected Vice President in 1994
and became an Executive Vice President in September 1995. Mr. Johnson is
currently General Manager of the Company's New Media Systems division.
Mr. Johnson holds a B.S. degree in Electrical Engineering from the University of
Minnesota.

The Company does not have any employment agreements with any of its
executive officers, but has one-year agreements not to compete with certain
of its executive officers and other key employees.

<PAGE>

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's stock is listed on the Nasdaq National Market under the
trading symbol "MWAR." The Company's stock was not publicly traded during the
fiscal year ended March 31, 1996.

As of June 21, 1996, there were 193 shareholders of record of the Company's
Common Stock.

On March 12, 1996, the Company effected a four-for-one stock split as a
three-to-one share dividend under Iowa law.

The Company has never paid any cash dividends on its capital stock and does
not expect to pay any cash dividends in the foreseeable future. Any future
determinations to pay cash dividends will be at the discretion of the Board of
Directors and will depend on the Company's earnings, capital requirements,
financial condition, credit and loan agreements in effect at that time and any
other factors deemed relevant by the Board of Directors.

<PAGE>

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following table contains certain selected consolidated financial
data. There were no cash dividends or distributions made by the Company
during the periods presented.

3 MONTHS
YEAR ENDED ENDED YEAR ENDED MARCH 31,
DEC. 31, MARCH 31, -------------------------------------------------
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues $ 13,060 $ 2,865 $ 15,087 $ 14,887 $ 18,899 $ 23,655
Cost of revenues 2,552 721 3,217 3,927 3,755 5,100
---------- ---------- ---------- ---------- ---------- ----------
Gross profit 10,508 2,144 11,870 10,960 15,144 18,555
---------- ---------- ---------- ---------- ---------- ----------
Operating expenses:
Research & development 3,248 1,058 4,083 4,756 5,649 5,009
Sales & marketing 2,667 727 3,272 3,791 5,614 8,421
General & administrative 3,027 819 3,583 3,786 3,330 3,899
Special charges --- --- --- 530 166 ---
---------- ---------- ---------- ---------- ---------- ----------
8,942 2,604 10,938 12,863 14,759 17,329
---------- ---------- ---------- ---------- ---------- ----------
Operating profit (loss) 1,566 (460) 932 (1,903) 385 1,226
---------- ---------- ---------- ---------- ---------- ----------
Other income (expense):
Foreign currency gain (loss), net (7) (100) 25 98 293 13
Interest (expense) income, net (304) (45) (253) (306) (132) 283
---------- ---------- ---------- ---------- ---------- ----------
(311) (145) (228) (208) 161 296
---------- ---------- ---------- ---------- ---------- ----------
Earnings (loss) before income tax expense (benefit) 1,255 (605) 704 (2,111) 546 1,522
Income tax expense (benefit) 562 (204) 477 314 (375) 146
---------- ---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ 693 $ (401) $ 227 $ (2,425) $ 921 $ 1,376
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Net earnings(loss) per share (1) $ 0.07 $ (0.04) $ 0.02 $ (0.25) $ 0.08 $ .11
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Weighted average common & common
equivalent shares outstanding (1) 9,579 9,361 10,148 9,608 12,063 13,030
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>

AS OF AS OF MARCH 31,
DEC. 31 --------------------------------------------------------------
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash & short-term investments $ 185 $ 47 $ 188 $ 2,823 $ 1,516 $ 12,337
Working capital (deficit) (450) (1,194) (2,076) 1,374 1,479 13,300
Total assets 7,488 6,607 8,668 11,622 12,124 24,938
Total long-term debt (2) 1,675 1,649 1,527 1,949 1,446 1,227
Total shareholders' equity 2,094 1,673 2,330 4,889 5,559 18,543
</TABLE>
_____________________________

(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of net earnings (loss) per share.

<PAGE>

(2) Includes current installments of long-term debt and long-term portion of
notes payable to banks. See Note 5 of Notes to Consolidated Financial
Statements.

<PAGE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION PROVIDES AN ANALYSIS OF THE COMPANY'S FINANCIAL
CONDITION AND RESULTS OF OPERATIONS, AND SHOULD BE READ IN CONJUNCTION WITH THE
"SELECTED CONSOLIDATED FINANCIAL DATA" AND THE NOTES THERETO AND THE
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES THERETO OF THE COMPANY, AS WELL
AS THE CAUTIONARY NOTE CONCERNING FORWARD-LOOKING INFORMATION WHICH APPEARS AT
THE BEGINNING OF PART I.

OVERVIEW

Microware develops, markets and supports real time operating system
software and high-level language compilers used in communications, process
control and factory automation, scientific research, government/defense and
consumer electronics applications. Microware's product line is built around the
OS-9 family of real time operating systems for advanced 16-bit and 32-bit
microprocessors. The Company's OS-9 product family includes options for
programming languages, networking, graphical interfaces and productivity tools.
Substantially all of the Company's revenues in the last and current fiscal years
have been derived from licenses and related services from the OS-9 product
family.

The Company has historically derived revenues from development licenses and
run-time license royalty fees along with sales of related software productivity
tools, maintenance support and custom contract engineering work. Custom
contract engineering revenues are typically derived from discrete software
engineering projects porting the OS-9 operating system along with customized
software products. Commonly, license royalty fees follow the completion of
these contracts. For financial reporting purposes, product revenues primarily
consist of software licenses and software development tool products, along with
license royalty fees earned. Services revenues principally consist of revenues
from custom contract engineering and maintenance support agreements, along with
consulting and training activity.

A key element of the Company's long-term strategy is to focus on markets
the Company anticipates will significantly increase run-time license royalty
fees. Since 1992, the Company has made significant investments targeting
various emerging markets including wireless personal communications, interactive
and digital television, and the Internet, through the development of software
modules that utilize the OS-9 operating system. DAVID development licenses and
related engineering services have been sold to over 20 manufacturers of products
incorporating DAVID software, for digital and interactive TV. Run-time license
royalty fees, maintenance support and ongoing software engineering contract work
revenues are expected to grow with the development of the digital and
interactive television industries. In July 1995, the Company entered into a
software license and custom contract engineering agreement with Motorola to
develop modular software solutions for Motorola's personal wireless
communication devices. Initial revenues will result from contract engineering
services. In

<PAGE>

addition to up-front development fees and future consulting and support
activities, the Company will receive a royalty for each pager or other wireless
product using OS-9 sold by Motorola or its sublicensees. Motorola also acquired
an equity position in the Company as part of this strategic relationship. See
Note 13 of the Notes to the Consolidated Financial Statements.

During fiscal 1996, the Company initiated development of OS-9 extension
products targeting mobile and fixed Internet/intranet access devices. As part
of these efforts, the Company has licensed the Java-TM- programming environment
and HotJava-TM- World Wide Web browser from Sun Microsystems, Inc. The Company
is working with Sun Microsystems, Inc. and other Internet solution providers in
order to extend the Company's product offerings which allow customers the
ability to expand their Internet features for pagers, smart cellular telephones,
personal/commercial mobile computing devices, and digital TV, along with other
intelligent Internet appliances.

The Company's operating results are subject to significant fluctuations on
both a quarterly and annual basis. The Company's future operating results will
depend significantly upon the emergence of the digital and interactive
television industries, the development of personal wireless communication
devices and the growth of the Internet, as well as the ability of the Company
and its customers to successfully penetrate these targeted markets. There can
be no assurance that the digital television, interactive television, wireless
industries or the Internet products market will develop as anticipated, that the
Company's current level of research and development spending and scope will be
adequate or that the Company will be able to generate significant revenues from
these markets.

RESULTS OF OPERATIONS

AMOUNTS AND PERCENTAGE OF REVENUES: The following table sets forth, for
the periods indicated, the amount and related percentage of the Company's total
revenues by each line item. "Gross Profit" shown for "Product and Services
Revenues" below is stated in amount and as a percentage of related revenues.

($ IN THOUSANDS)

AMOUNTS AND PERCENTAGE OF REVENUES
------------------------------------------------------------------------------
YEARS ENDED MARCH 31,
------------------------------------------------------------------------------
1994 1995 1996
------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Product revenues $10,862 73% $15,667 83% $16,104 68%
Services revenues 4,025 27 3,232 17 7,551 32
-------- ---- -------- ---- -------- ----
Total revenues 14,887 100 18,899 100 23,655 100
-------- ---- -------- ---- -------- ----
Cost of revenues:
Product 2,271 15 2,463 13 2,428 10
Services 1,656 11 1,292 7 2,672 11
-------- ---- -------- ---- -------- ----
3,927 26 3,755 20 5,100 21
-------- ---- -------- ---- -------- ----

<PAGE>

Gross profit 10,960 74 15,144 80 18,555 79
-------- ---- -------- ---- -------- ----
Operating expenses:
Research and devlpmt. 4,756 32 5,649 30 5,009 21
Sales and marketing 3,791 26 5,614 30 8,421 36
General and admin. 3,786 25 3,330 18 3,899 17
Special charges 530 4 166 1 - -
-------- ---- -------- ---- -------- ----
12,863 87 14,759 79 17,329 74
-------- ---- -------- ---- -------- ----
Operating profit (loss) (1,903) (13) 385 1 1,226 5
-------- ---- -------- ---- -------- ----

Other income (expense):
Foreign currency gain, net 98 1 293 2 13 *
Interest (expense)
income, net (306) (2) (132) * 283 1
-------- ---- -------- ---- -------- ----
(208) (1) 161 2 296 1
-------- ---- -------- ---- -------- ----
Earnings (loss) before income
tax expense (benefit) (2,111) (14) 546 3 1,522 6
Income tax expense (benefit) 314 2 (375) (2) 146 1
-------- ---- -------- ---- -------- ----
Net earnings (loss) $(2,425) (16)% $92 15% $1,376 6%
-------- ---- -------- ---- -------- ----
-------- ---- -------- ---- -------- ----
Gross profit:
Product $8,591 79% $13,204 85% $13,676 85%
Services $2,369 59% $1,940 60% $4,879 65%
</TABLE>
_________________________
*Insignificant

<PAGE>

FISCAL YEAR ENDED MARCH 31, 1996 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1995

REVENUES. Total revenues increased 25.2%, or $4.8 million from $18.9
million in fiscal 1995 to $23.7 million in fiscal 1996. Product and services
revenues respectively increased 2.8%, or $437,000 from $15.7 million to $16.1
million and 133.6%, or $4.3 million, from $3.2 million to $7.6 million in fiscal
1996 as compared to the prior fiscal year. The increase in overall Company
revenues principally accrues to custom contract engineering and support activity
reported in services revenues. The increase in custom contract engineering
revenue, from fiscal 1995 to fiscal 1996, includes approximately $2.4 million in
New Media projects - primarily DAVID, and $1.8 million in customer paid porting
of OS-9 product family technology to advanced microprocessors, wireless personal
communication devices, along with related engineering advisory services.

COST OF REVENUES. Cost of product revenues include direct and indirect
costs for documentation, production quality (including maintaining ISO 9001
Certification), duplication of manuals and media for software products, as well
as those costs related to the packaging, shipping and delivery of the product to
the customer. Cost of product revenues also include amortization of capitalized
software development costs. Cost of services revenues include direct and
indirect costs for technical phone support, training and education, as well as
custom engineering.

Total cost of revenues increased 35.8%, or approximately $1.3 million
between the fiscal years ended March 31, 1995 and 1996. Cost of product
revenues remained relatively constant in amount, but decreased by 2.7% of
sales from 13.0% in fiscal 1995, to 10.3% in fiscal 1996. Cost of
services revenues increased by approximately $1.4 million and from 6.8% of
revenues to 11.3% in fiscal 1995, as compared to fiscal 1996. Gross
profit on product revenues changed by .6% from 84.3% to 84.9%, and on services
revenues by 4.6% from 60.0% to 64.6% in fiscal 1995 as compared to fiscal 1996.
Amortization of capitalized software development cost included in cost of
product revenues amounted to $166,000 and $236,000 in fiscal 1995 and 1996,
respectively.

RESEARCH AND DEVELOPMENT. Research and development expense includes
expenses associated with the development of new products and the enhancements of
existing products, and consists primarily of employee salaries and related
expenses. Although the Company increased its technical staff from 85 people at
March 31, 1995 to 101 people at March 31, 1996, the total amount of research and
development expense decreased 11.3%, or $640,000, from $5.6 million to $5.0
million in respective fiscal years. The primary reason for the decrease is due
to an increase in customer funded custom contract services revenue which
transfers the recording of related engineering spending into the cost of
services revenue line. Between fiscal years 1995 and 1996 an approximate $1.5
million increase in engineering related expense has been charged to cost of
services revenue.

SALES AND MARKETING. Sales and marketing expense consists primarily of
sales and marketing personnel related costs, including sales

<PAGE>

commissions. Sales and marketing expense also includes costs of advertising,
public relations and attendance at industry trade shows. Sales and marketing
expense increased by 50.0%, or $2.8 million from $5.6 million to $8.4 million,
and as a percentage of revenue from 29.7% to 35.6% from fiscal 1995 to fiscal
1996. Included in the $2.8 million additional fiscal 1996 over fiscal 1995
costs are incremental costs of approximately $1.1 million in advertising and
public relations/marketing consulting; $1.1 million in additional commissions
and salaries; $415,000 in increased travel and trade show expense, and $175,000
in distributor/sales force termination costs.

GENERAL AND ADMINISTRATIVE. General and administrative expenses are
primarily related to finance and administrative functions. Overall, general and
administrative expenses increased $569,000 or 17.0% from $3.3 million in fiscal
1995 to $3.9 million in fiscal 1996. As a percentage of revenues, general and
administrative expenses decreased from 17.6% in fiscal 1995 to 16.5% in fiscal
1996. The overall increase in spending was primarily attributable to additional
personnel and associated overhead costs necessary to support the overall growth
of the Company.

<PAGE>

FISCAL YEAR ENDED MARCH 31, 1995 COMPARED TO FISCAL YEAR ENDED MARCH 31, 1994

REVENUES. Total revenues increased 27.0%, or $4.0 million, from $14.9
million in fiscal 1994 to $18.9 million in fiscal 1995. Product revenues
increased 44.2%, or $4.8 million from $10.9 million in fiscal 1994 to $15.7
million in fiscal 1995 due to both an increase of $2.6 million in DAVID license
revenues and an overall increase in OS-9 product family sales. Services
revenues decreased 19.7%, or $793,000 from $4.0 million in fiscal 1994 to $3.2
million in fiscal 1995. This decrease is primarily attributable to a decrease
in custom contract revenues associated with the development of interactive
kiosks, and occurred in spite of a 40.3% increase in maintenance support
revenues from $377,000 to $529,000, and a 39.4% increase in training revenues
from $523,000 to $729,000.

COST OF REVENUES. Cost of product revenues increased from $2.3 million in
fiscal 1994 to $2.5 million in fiscal 1995, but decreased as a percentage of
product revenues from 20.9% to 15.7% in fiscal 1994 and 1995, respectively. The
decrease in cost of product revenues as a percentage of product revenues
resulted primarily from higher gross margins achieved on sales of DAVID
licenses. Amortization of capitalized software development costs included in
cost of product revenues amounted to $116,000 and $166,000 in fiscal 1994 and
1995, respectively. As a percentage of services revenues cost of services
remained relatively constant at 41.1% and 40.0% for the fiscal years 1994 and
1995, respectively. Overall, cost of services decreased $364,000 from $1.7
million in fiscal 1994 to $1.3 million in fiscal 1995, primarily due to the
completion of custom contract development work related to interactive kiosks.

RESEARCH AND DEVELOPMENT. Research and development expenses increased
$893,000 or 18.8% from $4.8 million in fiscal 1994 to $5.7 million in fiscal
1995. As a percentage of revenues, research and development expenses decreased
from 31.9% in fiscal 1994 to 29.9% in fiscal 1995. The increase in absolute
terms was primarily due to the addition of nine engineers and their associated
costs during 1995 to assist the Company in the development of new media
products.

SALES AND MARKETING. Sales and marketing expenses increased $1.8 million,
or 48.1% from $3.8 million in fiscal 1994 to $5.6 million in fiscal 1995. As a
percentage of revenues, sales and marketing expenses increased from 25.5% in
fiscal 1994 to 29.7% in fiscal 1995. The increase as a percentage of revenues
was primarily attributable to an additional five new media sales and marketing
employees, along with increased advertising and trade show attendance costs
associated with DAVID development in fiscal 1995. The remaining overall dollar
increase is primarily attributable to increased salaries, sales commissions and
other related selling expenses resulting from the overall increase in Company
revenues.

GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
$456,000, or 12.0% from $3.8 million in fiscal 1994, to $3.3 million in fiscal
1995. As a percentage of revenues, general and

<PAGE>

administrative expenses decreased from 25.4% in fiscal 1994 to 17.6% in fiscal
1995. The Company's administrative expenses for its Japanese operations
decreased approximately $665,000 (See "Special Charges" below). Off-setting
this decrease was an increase in general and administrative expenses in the U.S.
attributable to additional personnel and associated overhead costs necessary to
support the overall growth in the Company's operations.

SPECIAL CHARGES. During the fiscal years ended March 31, 1994 and 1995,
the Company recorded nonrecurring special charges in Japan of $530,000 and
$166,000, respectively. Fiscal 1994 charges related primarily to the write-off
of inventory due to a restructuring of operations and severance and related
benefits for the termination of certain employees in Japan. Fiscal 1995 charges
related primarily to employee severance and related benefits for resizing the
operations in Japan.

PROVISION FOR INCOME TAXES. The Company's consolidated tax expense
(benefit) amounted to $314,000 and ($375,000) in fiscal 1994 and fiscal 1995,
respectively. The overall tax benefit in fiscal 1995 resulted primarily from
the Company utilizing foreign net operating loss carry-forwards, and reducing
its valuation allowance on deferred tax assets related to net operating losses
of its foreign subsidiaries in the fourth quarter of fiscal 1995. At March 31,
1995, the Company had deferred tax assets of $1.9 million recorded related to
foreign net operating loss carry-forwards. A valuation allowance of $1.6
million has been set up by the Company primarily to offset the gross deferred
tax assets created by the foreign net operating loss carry-forwards.
Utilization of the foreign net operating losses is dependent upon future taxable
income generated in the respective foreign operations.

QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited consolidated results of operations
data for each quarter in fiscal 1995 and 1996, as well as the percentage of the
Company's total revenues represented by each item. The unaudited consolidated
statements have been prepared on the same basis as the audited consolidated
financial statements contained herein. They include all adjustments, consisting
only of normal recurring adjustments that the Company considers necessary to
present fairly this information when read in conjunction with the Company's
annual audited Consolidated Financial Statements and Notes thereto appearing in
Item 8 of this Form 10-K. The Company's operating results for any one quarter
are not necessarily indicative of results for any future period.

<PAGE>

(IN THOUSANDS)
QUARTER ENDED

STATEMENT OF OPERATIONS DATA: JUNE 30 SEPT 30 DEC. 31 MAR. 31 JUNE 30 SEPT 30 DEC. 31 MAR. 31
- ----------------------------- ----- ------- ------- ------- ------- ------- ------- -------
1994 1994 1994 1995 1995 1995 1995 1996
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $3,576 $4,683 $5,339 $5,301 $4,768 $6,388 $5,717 $6,782
Cost of revenues 995 979 836 945 891 1,440 1,294 (1,475)
----- ----- ----- ----- ----- ----- ----- -----
Gross profit 2,581 3,704 4,503 4,356 3,877 4,948 4,423 5,307
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Research & development 1,190 1,264 1,365 1,830 1,283 1,304 1,204 1,218
Sales & marketing 1,131 1,232 `1,398 1,853 1,759 1,811 2,101 2,750
General & administrative 729 995 804 802 975 1,133 875 916
Special charges 166 ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
3,216 3,491 3,567 4,485 4,017 4,248 4,180 4,884
----- ----- ----- ----- ----- ----- ----- -----

Operating profit (loss) (635) 213 936 (129) (140) 700 243 423
----- ----- ----- ----- ----- ----- ----- -----
Other income (expense):
Foreign currency gain
(loss), net 173 24 (84) 180 ----- 83 (45) (25)
Interest (expense)
income, net (38) (32) (34) (28) (29) 50 156 106
----- ----- ----- ----- ----- ----- ----- -----
135 (8) (118) 152 (29) 133 111 81
----- ----- ----- ----- ----- ----- ----- -----

Earnings (loss) before
income taxes (500) 205 818 23 (169) 833 354 504
Income tax expense (benefit) (171) (91) 76 (189) 30 55 38 23
----- ----- ----- ----- ----- ----- ----- -----
Net earnings (loss) ($329) $296 $742 $212 ($199) $778 $316 $481
----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
</TABLE>

<PAGE>

(IN THOUSANDS)
QUARTER ENDED

PERCENTAGE OF REVENUE: JUNE 30 SEPT 30 DEC. 31 MAR. 31 JUNE 30 SEPT 30 DEC. 31 MAR. 31
- ---------------------- ----- ------- ------- ------- ------- ------- ------- -------
1994 1994 1994 1995 1995 1995 1995 1996
----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenues 27.8% 20.9% 15.7% 17.8% 18.7% 22.5% 22.6% 21.7%
----- ----- ----- ----- ----- ----- ----- -----
Gross profit 72.2% 79.1% 84.3% 82.2% 81.3% 77.5% 77.4% 78.3%
----- ----- ----- ----- ----- ----- ----- -----
Operating expenses:
Research & development 33.3% 27.0% 25.6% 34.5% 26.9% 20.4% 21.0% 18.0%
Sales & marketing 31.6% 26.3% 26.2% 35.0% 36.9% 28.4% 36.8% 40.5%
General & administrative 20.4% 21.3% 15.0% 15.1% 20.4% 17.7% 15.3% 13.5%
Special charges 4.7% ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
90.0% 74.6% 66.8% 84.6% 84.2% 66.5% 73.1% 72.0%
----- ----- ----- ----- ----- ----- ----- -----
Operating profit (loss) (17.8%) 4.5% 17.5% (2.4%) (2.9%) 11.0% 4.3% 6.3%

Other income (expense):
Foreign currency gain
(loss), net 4.8% 0.5% (1.6%) 3.3% - 1.3% (0.8%) (0.4%)
Interest (expense) income, net (1.0%) (0.6%) (0.6%) (0.5%) (0.6%) 0.7% 2.7% 1.6%
----- ----- ----- ----- ----- ----- ----- -----
3.8% (0.1%) (2.2%) 2.8% (0.6%) 2.0% 1.9% 1.2%
----- ----- ----- ----- ----- ----- ----- -----

Earnings (loss) before
income taxes (14.0%) 4.4% 15.3% 0.4% (3.5%) 13.0% 6.2% 7.5%

Income tax expense (benefit) (4.8%) (1.9%) 1.4% (3.6%) 0.7% 0.8% 0.7% 0.4%
----- ----- ----- ----- ----- ----- ----- -----
Net earnings (loss) (9.2%) 6.3% 13.9% 4.0% (4.2%) 12.2% 5.5% 7.1%
----- ----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- ----- -----
</TABLE>

<PAGE>

The Company's revenues and operating results have varied substantially from
quarter to quarter and should not be relied upon as an indication of future
performance. The Company believes its revenues may fluctuate from quarter to
quarter upon such factors as new product introductions by the Company or others,
seasonality of customer buying patterns, the Company's sales commission plan,
renewal of product licenses by customers, product development expenses, changes
in the Company and competitors' pricing policies, the timing of significant
orders, the mix of international versus domestic revenues, currency
fluctuations, the existence of product errors and the hiring and training of
additional staff. Furthermore, delays in closing product licensing transactions
or in completion of custom contract engineering work during any quarter could
cause quarterly revenues and net income for that quarter to fall below
anticipated levels. In addition, a significant portion of the Company's
operating expenses is relatively fixed, since personnel levels and other
expenses are based upon anticipated revenues.

LIQUIDITY AND CAPITAL RESOURCES

The Company has historically funded its operations primarily through cash
flow from operations, the private sale of common and preferred stock and to a
lesser extent long-term debt. At March 31, 1996, the Company had approximately
$13,300,000 in working capital and $12,337,000 in cash and short-term
investments as compared to $1,479,000 in working capital and $1,516,000 in cash
and short-term investments at March 31, 1995. The increase in working capital
and cash and short-term investments resulted from the Company entering into a
Stock and Warrant Purchase Agreement with Motorola, on July 31, 1995. See Note
13 of Notes to Consolidated Financial Statements.

The Company completed an initial public offering, effective April 2, 1996,
selling 2,000,000 shares of Common Stock newly issued by the Company and 500,000
shares offered by selling shareholders. The net proceeds to the Company from
the sale of the 2,000,000 shares of Common Stock is estimated to be
approximately $18,000,000 after deducting underwriting discounts and commissions
and estimated offering expenses. The prices for Microware's Common Stock may
fluctuate widely in the future due to actual or anticipated variations in the
Company's operating results, announcements of technical innovations or new
products or the services by the Company or its competitors, changes in earnings
estimates by securities analysts and other factors, including changes in
conditions of the software and other technology industries in general.

Cash (used in) provided by operating activities amounted to ($642,000),
$480,000 and $1,068,000 for fiscal years 1994, 1995 and 1996, respectively. The
$1,122,000 difference in cash provided by (used in) operating activities in
fiscal 1994, as compared to fiscal 1995 was primarily due to a change in net
earnings (loss) from ($2,425,000) to $921,000 and net changes in other
reconciling items of ($2,224,000). The $588,000 difference in cash provided by
operating activities in fiscal 1995, as compared to fiscal 1996 was primarily
due to a change in

<PAGE>

net earnings from $921,000 to $1,376,000 and net changes in other reconciling
items of $133,000.

Cash used in investing activities was $414,000, $823,000 and $1,301,000,
for fiscal years 1994, 1995 and 1996, respectively. These uses of cash were
related primarily to the purchase of computer and research equipment and
furniture and fixtures. On May 9, 1996, the Company purchased approximately
17.5 acres of land for approximately $2.1 million, on which the Company intends
to construct an office building accommodating 88,000 square feet of office space
at an estimated cost of approximately $9 million.

Cash provided by (used in) financing activities was $3,680,000, ($548,000)
and $11,211,000 for fiscal years 1994, 1995 and 1996, respectively. The
increase in cash from financing activities in fiscal 1994 was primarily due to
the issuance of $5.0 million of Series A Preferred Stock in order to balance the
Company's cash needs. The increase in cash from financing activities in fiscal
1996 was primarily due to the issuance of $12.1 million of Common Stock.

As of March 31, 1996, the Company had approximately $1,227,000 of long term
debt, including current portion, outstanding relating to its headquarters
building. The notes bear interest between 7.5% and 10.528%. See Note 5 of
Notes to Consolidated Financial Statements.

Management believes the proceeds from its stock offering, together with
current working capital, cash flow expected from operations, and its $1.0
million bank line of credit will be adequate to meet the Company's future
working capital, new product development and capital expenditure requirements at
least through fiscal 1997. The Company may use a portion of the net proceeds
from this offering to acquire businesses and/or products complementary to the
Company's business, or otherwise obtain the right to use complementary
technologies, although there can be no assurance that any such acquisitions will
be made.

Management does not believe that inflation has historically had a material
effect on the Company's results of operations. Many of the Company's
international contracts are denominated in local currencies, and an increase in
the relative value of the dollar against such currencies would lead to a
reduction in Company revenues. The Company attempts to minimize its foreign
currency exposure through keeping intercompany balances current and minimizing
assets in any one currency denomination. However, foreign currency sales are
not specifically hedged and there can be no assurance that the Company's future
results of operations will not be adversely affected by currency fluctuations.

ACCOUNTING POLICIES

In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"), which is effective for fiscal years beginning after December 15,
1995. SFAS 121 addresses the accounting for potential impairment of long-lived
assets. The effect of implementing

<PAGE>

SFAS 121 is expected to be immaterial to the Company's financial position and
results of operations.

In October 1995, the FASB issued Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123, which is
effective for fiscal years beginning after December 15, 1995, establishes
financial accounting and reporting requirements for stock-based employee
compensation plans. The effect of implementing SFAS 123 is expected to be
immaterial to the Company's financial position and results of operations.

<PAGE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this Item is contained in the financial statements
set forth in Item 14(a) under the caption "Consolidated Financial Statements."

<PAGE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

None.

<PAGE>

PART III

ITEMS 10-13

The response to Items 10, 11, 12, and 13 are incorporated by reference to the
information concerning the applicable subjects in the Company's Proxy Statement
for the 1996 Annual Meeting of Shareholders, to be filed no later than 120 days
following March 31, 1996.

<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULE, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

1. Consolidated Financial Statements

The following are included herein:
Independent Auditors' Report
Consolidated Balance Sheets as of March 31 1995 and 1996
Consolidated Statements of Operations for the three years ended March 31, 1996
Consolidated Statements of Shareholders' Equity for the three years ended
March 31, 1996
Consolidated Statements of Cash Flows for the three years ended March 31, 1996
Notes to Consolidated Financial Statements

2. Exhibits. The following are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission:

EXHIBIT NO. DESCRIPTION

- --------------------------------------------------------------------------------

3.1 Restated and Amended Articles of Incorporation of the Company, filed as
Exhibit 3.1(a) to Pre-Effective Amendment No. 3 to the Company's
Registration Statement on Form S-1, Reg. No. 33-99160, and hereby
incorporated by reference.
3.2 Restated and Amended Bylaws of the Company, filed as Exhibit 3.2(a) to
Pre-Effective Amendment No. 3 to the Company's Registration Statement on
Form S-1, Reg. No. 33-99160, and hereby incorporated by reference.
4.1 Articles of Incorporation and Bylaws of the Company (included in
Exhibits 3.1 and 3.2).
10.1 Stock and Warrant Purchase Agreement between the Company and Motorola,
Inc. dated July 31, 1995, including Form of Warrant, filed as Exhibit
10.1 to the Company's Registration Statement on Form S-1, Reg. No. 33-
99160, and hereby incorporated by reference.
10.2 Shareholder Agreement among the Company, Kenneth B. Kaplan, and Motorola,
Inc. dated July 31, 1995, filed as Exhibit 10.2 to the Company's
Registration Statement on Form S-1, Reg. No. 33-99160, and hereby
incorporated by reference.
10.3 Agreement among the Company, Kenneth B. Kaplan, Lawrence A. Crane, and
the 1994 Series A Preferred Stock holders dated March 11, 1996, filed as
Exhibit 10.18 to Pre-Effective Amendment No. 3 to the Company's
Registration Statement on Form S-1, Reg. No. 33-99160, and hereby
incorporated by reference.
10.4 Software Development and License Agreement between the Company and
Motorola, Inc., filed as Exhibit 10.17 to Pre-Effective Amendment No. 3

<PAGE>

to the Company's Registration Statement on Form S-1, Reg. No. 33-99160,
and hereby incorporated by reference.
10.5 1989 Stock Option Plan of the Company, filed as Exhibit 10.5 to the
Company's Registration Statement on Form S-1, Reg. No. 33-99160, and
hereby incorporated by reference.
10.6 1991 Stock Option Plan of the Company, filed as Exhibit 10.6 to the
Company's Registration Statement on Form S-1, Reg. No. 33-99160, and
hereby incorporated by reference.
10.7 1992 Stock Option Plan of the Company, filed as Exhibit 10.7 to the
Company's Registration Statement on Form S-1, Reg. No. 33-99160, and
hereby incorporated by reference.
10.8 1995 Stock Option Plan of the Company, filed as Exhibit 10.8 to the
Company's Registration Statement on Form S-1, Reg. No. 33-99160, and
hereby incorporated by reference.
10.9 401(k) Plan of the Company, filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1, Reg. No. 33-99160, and hereby
incorporated by reference.
10.10 Non-Contributory Profit Sharing Plan of the Company, filed as Exhibit
10.10 to the Company's Registration Statement on Form S-1, Reg. No. 33-
99160, and hereby incorporated by reference.
10.11 Credit Agreement between the Company and Norwest Bank Iowa, National
Association dated October 20, 1995, including Commercial Note Agreement,
filed as Exhibit 10.11 to the Company's Registration Statement on
Form S-1, Reg. No. 33-99160, and hereby incorporated by reference.
10.12 Lease Agreement between the Company and RW III Partnership dated October
10, 1995, filed as Exhibit 10.13 to the Company's Registration Statement
on Form S-1, Reg. No. 33-99160, and hereby incorporated by reference.
10.13 Mortgage and related documents between the Company and Brenton Bank,
N.A., dated December 10, 1993, filed as Exhibit 10.14 to the Company's
Registration Statement on Form S-1, Reg. No. 33-99160, and hereby
incorporated by reference.
10.14 Mortgage between the Company and the Iowa Business Growth Company, dated
February 24, 1987, filed as Exhibit 10.15 to the Company's Registration
Statement on Form S-1, Reg. No. 33-99160, and hereby incorporated by
reference.
10.15 Real Estate Purchase Agreement between Charles I. Colby, Jr. and Patricia
E. Colby, Sellers, and Mid-America Investment Co., Buyer, dated November
21, 1995, with amendments, and Assignment and Conveyance of Interest from
Mid-America Investment Co. to the Company, dated May 9, 1996.
10.16 Real Estate Purchase Agreement between Charles I. Colby, III and Victoria
R. Colby, Sellers, and Mid-America Investment Co., Buyer, dated November
21, 1995, with amendments, and Assignment and Conveyance of Interest from
Mid-America Investment Co. to the Company, dated May 9, 1996.
10.17 Real Estate Purchase Agreement between Mid-America Investment Co.
and the Company dated May 9, 1996.
21.1 Subsidiaries of the Registrant, filed as Exhibit 21.1 to the Company's
Registration Statement on Form S-1, Reg. No. 33-99160, and hereby
incorporated by reference.
27 Financial Data Schedule (EDGAR version only).

<PAGE>

(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of fiscal year 1996.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto authorized, on the 28th day of June,
1996.

MICROWARE SYSTEMS CORPORATION,
AN IOWA CORPORATION

By: /s/ Kenneth B. Kaplan
--------------------------------
Kenneth B. Kaplan, President and
Chief Executive Officer

KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned directors and
officers of Microware Systems Corporation, an Iowa corporation, which is filing
an Annual Report on Form 10-K with the Securities and Exchange Commission, under
the provisions of the Securities Exchange Act of 1934 as amended, hereby
constitute and appoint Kenneth B. Kaplan, George J. Barry, Lawrence A. Crane and
Arthur Don and each of them, each of their true and lawful attorneys-in-fact and
agents; with full power of substitution and resubstitution, for him or her and
in his or her name, place and stead, in any and all capacities, to sign such and
any or all amendments to the report to be filed with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
interests and purposes as each of them might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents or any of
them, or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

Chairman, President & Chief
/s/ Kenneth B. Kaplan Executive Officer (Principal
- ------------------------- Executive Officer) June 25, 1996
Kenneth B. Kaplan

Chief Financial Officer,
Executive Vice President -
/s/ George J. Barry Financial & Treasurer (Principal
- ------------------------- Financial & Accounting Officer June 25, 1996
George J. Barry

/s/ Lawrence A. Crane Executive Vice President,
- ------------------------- Secretary & Director June 27, 1996
Lawrence A. Crane

<PAGE>

SIGNATURE TITLE DATE
--------- ----- ----

/s/ Charles R. Ball Executive Vice President &
- ------------------------- Director June 26, 1996
Charles R. Ball

/s/ Arthur Don
- -------------------------
Arthur Don Director June 25, 1996

/s/ James A. Gordon
- -------------------------
James A. Gordon Director June 23, 1996

/s/ Robert L. Growney
- -------------------------
Robert L. Growney Director June 25, 1996

/s/ Daniel P. Howell
- -------------------------
Daniel P. Howell Director June 24, 1996

/s/ Dennis E. Young
- -------------------------
Dennis E. Young Director June 23, 1996

48
<PAGE>

INDEPENDENT AUDITORS' REPORT

Board of Directors
Microware Systems Corporation:

We have audited the accompanying consolidated balance sheets of Microware
Systems Corporation and subsidiaries as of March 31, 1995 and 1996 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended March 31, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Microware
Systems Corporation and subsidiaries at March 31, 1995 and 1996 and the results
of their operations and their cash flows for each of the years in the three-year
period ended March 31, 1996, in conformity with generally accepted accounting
principles.

KPMG PEAT MARWICK LLP

Des Moines, Iowa
May 2, 1996, except as to the last paragraph of note 15 which is as of
May 9, 1996

F-1
<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands, except per share amounts)

March 31,
-----------------------
Assets 1995 1996
------ ---- ----
Current assets:
Cash and short-term investments $ 1,516 $ 12,337
Trade receivables, net of allowance
for doubtful accounts of $78
and $366 (notes 2 and 4) 3,998 4,946
Income taxes receivable 322 211
Inventories (note 4) 42 39
Prepaid expenses and other current
assets 315 226
Deferred tax assets (note 6) 277 518
-------- ---------
Total current assets 6,470 18,277
-------- ---------
Property and equipment, net (notes 3
and 5) 3,665 4,002
-------- ---------

Other assets:
Intangible assets, net of amortization
(notes 1 and 4) 916 1,228
Deposits and other (note 4) 1,073 1,431
-------- ---------
Total other assets 1,989 2,659
-------- ---------
$ 12,124 $ 24,938
-------- ---------
-------- ---------

See accompanying notes to consolidated financial statements.

F-2

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
($ in thousands, except per share amounts)

March 31,
Liabilities and -----------------------
Shareholders' Equity 1995 1996
-------------------- ---- ----

Current liabilities:
Notes payable to banks (note 4) $ 1,007 $ 873
Current installments of long-term
debt (note 5) 46 39
Accounts payable 1,209 1,665
Accrued expenses 1,779 1,361
Deferred revenues 772 888
Income taxes payable 178 151
-------- ---------
Total current liabilities 4,991 4,977
Long-term debt, less current
installments (note 5) 1,400 1,188
Deferred income taxes (note 6) 174 230
-------- ---------
Total liabilities 6,565 6,395
-------- ---------

Shareholders' equity (notes 7, 8,
13 and 15):
Series A preferred stock, $14.71 par
value; 340,000 shares authorized;
340,000 shares issued and
outstanding 5,001 5,001
Series I preferred stock, no par
value; 500,000 shares authorized;
none issued or outstanding -- --
Common stock, voting, no par
value; 50,000,000 shares authorized;
8,909,320 and 10,439,552 shares
issued; 8,684,220 and 10,214,452
shares outstanding 1,052 13,094
Retained earnings 284 1,660
Cumulative adjustment from
foreign currency translation (1) (435)
-------- ---------
6,336 19,320

Less cost of common shares acquired
for the treasury, 225,100 and
225,100 shares 777 777
-------- ---------
Total shareholders' equity 5,559 18,543
-------- ---------
Commitments (note 14)

$ 12,124 $ 24,938
-------- ---------
-------- ---------

See accompanying notes to consolidated financial statements.

F-3

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
($ in thousands, except per share amounts)

Years ended March 31,
---------------------------------------
1994 1995 1996
---- ---- ----

Revenues (notes 2 and 10):
Product $ 10,862 $ 15,667 $ 16,104
Services 4,025 3,232 7,551
--------- --------- ---------
14,887 18,899 23,655
--------- --------- ---------
Cost of revenues:
Product 2,271 2,463 2,428
Services 1,656 1,292 2,672
--------- --------- ---------
3,927 3,755 5,100
--------- --------- ---------
Gross profit 10,960 15,144 18,555
--------- --------- ---------
Operating expenses:
Research and development 4,756 5,649 5,009
Sales and marketing 3,791 5,614 8,421
General and administrative 3,786 3,330 3,899
Special charges (note 2) 530 166 --
--------- --------- ---------
12,863 14,759 17,329
--------- --------- ---------
Operating (loss) profit (1,903) 385 1,226
--------- --------- ---------
Other income (expense):
Foreign currency gain, net 98 293 13
Interest expense (319) (162) (151)
Interest income 13 30 434
--------- --------- ---------
(208) 161 296
--------- --------- ---------
(Loss) earnings before
income tax expense
(benefit) (2,111) 546 1,522
Income tax expense (benefit)
(note 6) 314 (375) 146
--------- --------- ---------
Net (loss) earnings
(note 10) $ (2,425) $ 921 $ 1,376
--------- --------- ---------
--------- --------- ---------
Net (loss) earnings per share $ (.25) $ .08 $ .11
--------- --------- ---------
--------- --------- ---------
Weighted average common and
common equivalent shares
outstanding 9,608,470 12,063,099 13,029,611
--------- --------- ---------
--------- --------- ---------

See accompanying notes to consolidated financial statements.

F-4

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Shareholders' Equity

($ in thousands)

Cumulative
adjustment
from
Retained foreign Total
Preferred Common earnings currency Treasury shareholders'
stock stock (deficit) translation stock equity
----- ----- --------- ----------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1993 $ - $ 1,038 $ 1,830 $ 140 $ (678) $ 2,330

Issuance of common shares
of stock to profit sharing plan - 3 (1) - 147 149
Purchase of common shares of stock
at cost - - - - (153) (153)
Issuance of common shares of stock
to employee - 11 - - 18 29
Issuance of preferred shares of stock 5,001 - - - - 5,001
Legal fees incurred for issuance
of preferred shares of stock - - (41) - - (41)
Net loss - - (2,425) - - (2,425)
Current translation adjustment - - - (1) - (1)
------- ------- ------- ------ ------ --------

Balance at March 31, 1994 5,001 1,052 (637) 139 (666) 4,889
Purchase of common shares of stock
at cost - - - - (111) (111)
Net earnings - - 921 - - 921
Current translation adjustment - - - (140) - (140)
------- ------- ------- ------ ------ --------

Balance at March 31, 1995 5,001 1,052 284 (1) (777) 5,559
Issuance of common shares of stock - 12,104 - - - 12,104
Legal and other fees incurred for
issuance of common shares of stock - (62) - - - (62)
Net earnings - - 1,376 - - 1,376
Current translation adjustment - - - (434) - (434)
------- ------- ------- ------ ------ --------
Balance at March 31, 1996 $ 5,001 $13,094 $ 1,660 $ (435) $ (777) $(18,543)
------- ------- ------- ------ ------ --------
------- ------- ------- ------ ------ --------

</TABLE>

See accompanying notes to consolidated financial statements.

F-5

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

($ in thousands)

Years ended March 31,
--------------------------------------
1994 1995 1996
---- ---- ----

Cash flows from operating
activities:
Net (loss) earnings $(2,425) $ 921 $ 1,376
Adjustments to reconcile net
(loss) earnings to net cash
(used in) provided by
operating activities:
Depreciation and amortization 993 976 1,273
Loss on sale of property and
equipment - 128 23
Deferred income taxes 174 (319) (185)
Increase in trade
receivables, net (184) (1,058) (1,248)
Decrease (increase) in
income taxes receivable 66 (292) 111
Decrease in inventories 284 49 3
(Increase) decrease in other
current assets (72) (135) 69
(Increase) decrease in
other assets (442) 75 (726)
(Increase) decrease in
accounts payable 549 (664) 547
Increase (decrease) in
accrued expenses 363 617 (333)
Increase in deferred revenue 69 138 164
(Decrease) increase in income
taxes payable (17) 44 (6)
------- --------- ---------

Net cash (used in) provided by
operating activities (642) 480 1,068
------- --------- ---------

Cash flows from investing activities:
Capital expenditures (414) (841) (1,320)
Proceeds from sale of property
and equipment - 18 19
------- --------- ---------
Net cash used in investing
activities (414) (823) (1,301)
------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of notes
payable to banks 1,837 2,667 3,142
Principal payments on notes
payable to banks and long-term
debt (2,977) (3,099) (3,406)
Principal payments under
capital lease obligations (16) (5) -
Purchase of treasury shares of
stock (153) (111) -
Proceeds on issuance of
preferred shares of stock 5,001 - -
Legal and other fees incurred for
issuance of preferred and
common shares of stock (41) - (62)
Proceeds on issuance of common
shares of stock - - 12,104
Options exercised by employee 29 - -
Deferred offering costs - - (567)
------- --------- ---------

Net cash provided by (used in)
financing activities 3,680 (548) 11,211
------- --------- ---------

2,624 (891) 10,978
Effect of foreign currency exchange
rate changes on cash 11 (416) (157)
------- --------- ---------
Net increase (decrease) in
cash and short-term
investments 2,635 (1,307) 10,821
Cash and short-term investments at
beginning of year 188 2,823 1,516
------- --------- ---------
Cash and short-term investments
at end of year $ 2,823 $ 1,516 $ 12,337
------- --------- ---------
------- --------- ---------

See accompanying notes to consolidated financial statements.

F-6

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements

($ in thousands, except per share amounts)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the financial statements of
Microware Systems Corporation (Microware) and its subsidiaries (the Company):
Microware Systems (U.K.) Limited; Microware Systems K.K.; MSC Toolco, Inc.;
Microware Systems France S.A.R.L.; and MicroMall, Inc.. All significant
intercompany balances and transactions have been eliminated in consolidation.

NATURE OF BUSINESS

The Company develops and markets operating system software and high-level
language compilers used in industrial automation, communications, scientific
research, and consumer electronics applications. The Company's operations are
primarily conducted in North America, Japan and Europe.

TRANSLATION OF FOREIGN FINANCIAL STATEMENTS

All assets and liabilities in the balance sheets of foreign subsidiaries
whose functional currency is other than the U.S. dollar are translated at year-
end exchange rates. Income and expense items are translated at the average
exchange rate for the year. Translation gains and losses are not included in
determining net earnings but are accumulated as a separate component of
shareholders' equity. Foreign currency transaction gains and losses are
included in determining net earnings.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

CASH AND SHORT-TERM INVESTMENTS

Short-term investments consist of money market accounts, a United States
treasury fund and 90-day United States treasury bills of approximately $900 and
$11,900 at March 31, 1995 and 1996, respectively.

INVENTORIES

Inventories are composed primarily of user manuals and software media
production materials and are stated at the lower of cost or market on a first-
in, first-out basis. Additionally, inventories include costs incurred to develop
customized software under certain consulting agreements in progress.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost and are depreciated on
straight-line methods with estimated useful lives of 5 to 30 years for
building and improvements and 3 to 5 years for furniture, fixtures, and
equipment and research and development equipment.

F-7

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

($ in thousands, except per share amounts)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS, CONTINUED

INTANGIBLE ASSETS

The balance of intangible assets as of March 31, 1995 and 1996 consisted of
the following:

1995
---------------------------------------
Accumulated
Cost amortization Net
---- ------------ ---
Capitalized software
development costs $ 701 $ 300 $ 401
Goodwill 901 608 293
Patents, copyrights, and other 543 321 222
-------- -------- --------
$ 2,145 $ 1,229 $ 916
-------- -------- --------
-------- -------- --------

1996
---------------------------------------
Accumulated
Cost amortization Net
---- ------------ ---
Capitalized software
development costs $ 1,292 $ 536 $ 756
Goodwill 789 547 242
Patents, copyrights, and other 624 394 230
-------- -------- --------
$ 2,705 $ 1,477 $ 1,228
-------- -------- --------
-------- -------- --------

The Company capitalizes certain costs incurred in the production of
computer software once technological feasibility of the product to be marketed
has been established. Costs incurred prior to technological feasibility are
expensed as research and development costs. Capitalization of these costs
ceases when the product is considered available for general release to
customers.

Amortization of capitalized software development costs is calculated as the
greater of the ratio that current revenues bear to estimated future revenues or
the straight-line method over the expected product life cycle of three years.
Amortization of capitalized software development costs amounted to $116, $166,
and $236 for the years ended March 31, 1994, 1995, and 1996, respectively.

Goodwill and patents, copyrights, and other are being amortized over 5 to
15 year periods on the straight-line method. The Company assesses the
recoverability of goodwill through analysis of undiscounted cash flows.

INVESTMENT IN OPTIMAGE INTERACTIVE SERVICES COMPANY, L.P. (OPTIMAGE)

The Company had a 20 percent interest in OptImage, a limited partnership.
The Company carried the investment at zero at March 31, 1994 and 1995. In April
1995, the Company sold its interest to the General Partner of OptImage for $100.

F-8

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

($ in thousands, except per share amounts)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS, CONTINUED

ADVERTISING

Advertising costs incurred for the years ended March 31, 1994, 1995, and
1996 were $526, $539, and $1,277, respectively.

REVENUES RECOGNITION

Product revenues primarily consist of software licenses and development
tool products sold and royalties earned from equipment distributors. Software
license fees are recognized as revenues upon contract signing and shipment of
the software master copy. Sales of development tool products are recognized as
revenues upon shipment. Royalties earned from equipment distributors are
recognized as revenues when reported by the equipment distributors.

Service revenues are derived primarily from custom contract engineering,
postcontract customer support (maintenance) agreements, and training and
consulting services. Revenues from custom contract engineering are recognized
using the percentage of completion method. Maintenance revenues, including
maintenance bundled with software license fees, are recognized ratably over the
term of the related agreements. Revenues from training and consulting services
are recognized as the services are rendered.

INCOME TAXES

The Company accounts for income taxes under the provisions of the Financial
Accounting Standards Board's Statement No. 109 (SFAS 109), "Accounting for
Income Taxes," which requires the use of the asset and liability method of
accounting for deferred income taxes. Under the asset and liability method of
SFAS 109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. Under SFAS 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.

F-9

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

($ in thousands, except per share amounts)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED MATTERS, CONTINUED

COMPUTATION OF NET EARNINGS (LOSS) PER SHARE

Net earnings (loss) per share is based on the weighted average number of
common and dilutive common equivalent shares (common stock options and warrants
using the treasury stock method) and convertible preferred stock (as if
converted to common stock on the original date of issuance) outstanding during
the periods presented. As of March 31, 1996, there were no established market
prices for the common stock of the Company. The market prices used in the
computation of net earnings (loss) per share were average values calculated from
the annual appraisals of the Company's common shares of stock performed by
independent appraisers. Pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 83, all stock issued and warrants and options to
purchase shares of common stock granted by the Company at a price less than the
initial filing price during the twelve months preceding the initial public
offering date (using the treasury stock method) have been included in the
computation of common and common equivalent shares as if they were outstanding
for all periods presented.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires the Company to disclose the
estimated fair values for its financial instruments. Fair value estimates,
methods, and assumptions are set forth below:

CASH AND SHORT-TERM INVESTMENTS, TRADE RECEIVABLES, NOTES PAYABLE TO
BANKS, ACCOUNTS PAYABLE AND ACCRUED EXPENSES

The carrying amount approximates the estimated fair value due to the short-
term nature of those instruments.

LONG-TERM DEBT

Rates currently available to the Company for such borrowings with similar
terms and remaining maturities are used to discount the future cash flows to
estimate the fair value for long-term debt.

LIMITATIONS

Fair value estimates are made as of a specific point in time, based upon
the relevant market information about the financial instruments. Because no
market exists for a majority of the Company's financial instruments, fair
value estimates are based on judgments regarding current economic conditions
and other factors. These estimates are subjective in nature and involve
uncertainties and matters of judgment and, therefore, cannot be determined
with precision. Changes in assumptions could significantly affect the
estimates.

F-10

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

($ in thousands, except per share amounts)

(2) TRADE RECEIVABLES

At March 31, 1995, the Company had 2 customers whose trade receivable
balances exceeded 10 percent of consolidated trade receivables. Trade
receivables at March 31, 1995 for these 2 customers were $477 and $428 and
revenues for the year ended March 31, 1995 for these 2 customers were
approximately $1,905 and $758, respectively. At March 31, 1996, the Company had
one customer whose trade receivable balance exceeded 10 percent of consolidated
trade receivables. Trade receivables at March 31, 1996 for this customer were
$768 and revenues for the year ended March 31, 1996 for this customer totaled
approximately $1,516.

The activity in the Company's allowance for doubtful accounts for the years
ended March 31, 1994, 1995, and 1996 consisted of the following:

Balance at Additions Deductions,
beginning charged to net of Balance at
of year expenses recoveries end of year
---------- ---------- ----------- -----------
Year ended March 31, 1994 $ 70 $ 34 $ 10 $ 94
------- ------- ------- -------
------- ------- ------- -------
Year ended March 31, 1995 $ 94 $ 57 $ 73 $ 78
------- ------- ------- -------
------- ------- ------- -------
Year ended March 31, 1996 $ 78 $ 367 $ 79 $ 366
------- ------- ------- -------
------- ------- ------- -------

(3) PROPERTY AND EQUIPMENT

Property and equipment consisted of the following:

March 31,
----------------------
1995 1996
------- -------
Land and improvements $ 144 $ 144
Building 2,017 2,042
Furniture, fixtures, and equipment 2,668 3,316
Research and development equipment 2,808 2,900
Leasehold improvements 52 102
------- -------
7,689 8,504
Accumulated depreciation and amortization 4,024 4,502
------- -------
$ 3,665 $ 4,002
------- -------
------- -------

F-11

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

($ in thousands, except per share amounts)

(4) NOTES PAYABLE TO BANKS

Microware had a $2,250 line of credit with a bank which bore interest at
1/2 percent above the bank's base rate; the interest rate was 10 percent at
March 31, 1995. The line of credit matured on September 30, 1995. Funds
advanced were secured by Microware's trade receivables, inventories, and
intangible assets. There was $545 in borrowings outstanding at March 31, 1995.
On October 20, 1995, Microware received a commitment from a bank for a $1,000
line of credit to bear interest at the bank's base rate; the interest rate was
8.25 percent at March 31, 1996. The line of credit matures at the earlier of
demand or October 31, 1996 and is renewable annually. Funds advanced were
secured by Microware's trade receivables, inventories, and intangible assets.
There was $500 in borrowings outstanding at March 31, 1996.

Microware Systems K.K. has credit agreements with various maturities with
two Japanese banks. Outstanding balances at March 31, 1995 and 1996 totaled
$462 and $373, respectively. The weighted average interest rate was 2.125
percent at March 31, 1996. The credit agreements are secured by Microware
Systems K.K.'s deposit for office space in the amount of $569 at March 31, 1996.

(5) LONG-TERM DEBT

Long-term debt at March 31, 1995 and 1996 consisted of the following:

March 31,
-----------------
1995 1996
------ ------
Mortgage note (A) $ 184 $ -
Mortgage note (B) 212 203
Mortgage note with bank (C) 1,050 1,024
------ ------
1,446 1,227
Less current installments 46 39
------ ------
Long-term debt, excluding current installments $ 1,400 $ 1,188
------ ------
------ ------
(A) The note was paid off in August 1995.

(B) The note is secured by the Company's headquarters building,
subject to mortgage note (C), and is guaranteed by the Small
Business Administration and the Company's major shareholder.
Monthly payments are $3, including interest at 10.528
percent, with the unpaid balance due June 1, 2007.

(C) The note is secured by the Company's headquarters building
and is guaranteed by the Company's major shareholder.
Monthly payments are $9, including a variable interest rate,
adjusted every 3 years (7.50 percent at March 31, 1996),
with the unpaid balance due December 13, 2013.

F-12

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

($ in thousands, except per share amounts)

(5) LONG-TERM DEBT, CONTINUED

The aggregate maturities of long-term debt for each of the five years
ending March 31, 2001 and thereafter are as follows:
1997 $ 39
1998 42
1999 46
2000 49
2001 54
Thereafter 997
-------
$ 1,227
-------
-------

The carrying amount of the Company's long-term debt approximates the fair
value as of March 31, 1996.

(6) INCOME TAXES

The provision for income taxes is based on (loss) earnings before income
tax expense (benefit) as follows:

1994 1995 1996
------- ------- -------
United States $ 678 $ (228) $ (234)
Foreign (2,789) 774 1,756
------- ------- -------
$(2,111) $ 546 $ 1,522
------- ------- -------
------- ------- -------

Components of income tax expense (benefit) for the years ended March 31,
1994, 1995, and 1996 consist of the following:
1994
--------------------------------------
Domestic Foreign
income income Total
-------- -------- --------
Current $ 117 $ 23 $ 140
Deferred 94 80 174
-------- -------- --------
$ 211 $ 103 $ 314
-------- -------- --------
-------- -------- --------

1995
--------------------------------------
Domestic Foreign
income income Total
-------- -------- --------
Current $ 12 $ 3 $ 15
Deferred (390) -- (390)
-------- -------- --------
$ (378) $ 3 $ (375)
-------- -------- --------
-------- -------- --------

1996
--------------------------------------
Domestic Foreign
income income Total
-------- -------- --------
Current $ 269 $ 62 $ 331
Deferred (185) -- (185)
-------- -------- --------
$ 84 $ 62 $ 146
-------- -------- --------
-------- -------- --------

F-13

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

($ in thousands, except per share amounts)

(6) INCOME TAXES, CONTINUED

Income tax expense (benefit) for the years ended March 31, 1994, 1995,
and 1996 differs from the "expected" income tax (benefit) expense computed by
applying the United States federal income tax rate of 34 percent to pretax
(loss) income due to the following:

1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax (benefit) expense $ (718) $ 186 $ 517
Increase (decrease) in taxes resulting from:
Foreign losses without current benefit 982 -- --
Utilization of foreign net
operating loss carryforwards -- (262) (208)
Change in the beginning of the
year balance of the valuation
allowance for deferred tax assets
allocated to income tax expense -- (284) (173)
Other 50 (15) 10
------- ------- -------
$ 314 $ (375) $ 146
------- ------- -------
------- ------- -------

</TABLE>

The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at March 31, 1995 and 1996 are presented below:

March 31,
-----------------------
1995 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Foreign net operating loss carryforwards $ 1,864 $ 913
Post contract customer support unearned revenue 118 177
Compensation/benefits 76 28
Inventories 51 54
Allowance for doubtful accounts 12 115
Foreign tax credit carryforwards 29 -
Research tax credit carryforwards 12 -
Other 90 64
-------- --------
Total gross deferred tax assets 2,252 1,351
Less valuation allowance 1,580 760
-------- --------
Total deferred tax assets 672 591
-------- --------
Deferred tax liabilities:
Deficit in MSC Toolco, Inc. 298 -
Capitalized software costs 136 114
Property and equipment 135 189
-------- --------
Total deferred tax liabilities 569 303
-------- --------
Net deferred tax assets $ 103 $ 288
-------- --------
-------- --------

</TABLE>

The net deferred tax assets at March 31, 1995 and 1996, are composed of
current deferred tax assets of $277 and $518, respectively, and noncurrent
deferred tax liabilities of $174 and $230, respectively.

F-14

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

($ in thousands, except per share amounts)

(6) INCOME TAXES, CONTINUED

The net change in the total valuation allowance for the years ended March
31, 1995 and 1996 was a decrease of $213 and $820, respectively. A valuation
allowance has been set up primarily to offset the gross deferred tax assets
created by foreign net operating loss carryforwards. Utilization of the foreign
net operating losses is dependent upon future taxable income generated in the
respective foreign subsidiaries. Management believes it is more likely than not
that the results of future foreign operations will generate sufficient taxable
income to realize that portion of the deferred tax asset recorded related to the
foreign net operating loss carryforwards. The foreign net operating loss
carryforwards expire as follows: $190 in 1997, $443 in 1998 and $1,743 in 1999.

(7) PREFERRED STOCK ISSUANCE

On March 31, 1994, the Company issued and sold 340,000 shares of Series A
preferred stock, par value $14.71 per share to a group of four investors. A
conversion formula in the stock purchase agreement provides for conversion of
preferred stock into common stock with adjustments for dilution. Each share of
the Series A preferred stock has voting rights equal to the number of shares of
common stock into which such share is then convertible. The stock purchase
agreement also provides for the declaration and payment of a quarterly cash
dividend at the annual rate of 8 percent of the par value of $14.71 per
outstanding share of the Series A preferred stock commencing on July 1, 1999.
The Series A preferred stock was converted into common stock subsequent to March
31, 1996. See note 15.

(8) SHAREHOLDERS' EQUITY

The Company has established 1989, 1991, 1992 and 1995 Stock Option Plans
(the Plans) and granted options to certain employees to purchase shares of
common stock. The options granted under the Plans shall expire 10 years from
the date such option is granted. Options are exercisable under conditions
specified in the Plans' agreements.

The 1989, 1991, 1992 and 1995 Plans had available 1,200,000, 512,000,
496,000 and 1,120,000 total shares of common stock subject to option,
respectively.

F-15

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

($ in thousands, except per share amounts)

(8) SHAREHOLDERS' EQUITY, CONTINUED

Activity for the Company's Plans is as follows:
Number Option price
of shares per share
--------- ----------
<S> <C> <C>
1989 PLAN
Outstanding at March 31, 1993 752,000
Canceled 16,000
Exercised 24,072 $ .50
--------- ----------
----------
Outstanding at March 31, 1994 711,928
Canceled 55,928
---------
Outstanding at March 31, 1995 and 1996 656,000
----------
----------
1991 PLAN
Outstanding at March 31, 1993, 1994 and 1995 512,000
Canceled 40,000 $ .9375
----------
----------
Exercised 4,000
----------
Outstanding at March 31, 1996 468,000
----------
----------
1992 PLAN
Outstanding at March 31, 1993 496,000
Canceled 48,000
----------
Outstanding at March 31, 1994 448,000 $ 1.3125
----------
----------
Canceled 96,000
----------
Outstanding March 31, 1995 and 1996 352,000
----------
----------
1995 PLAN
Outstanding at March 31, 1995 -
Issued 804,400
Canceled 10,200 $ 3.125
---------- ----------
----------
Outstanding at March 31, 1996 794,200
----------
----------

</TABLE>

On March 12, 1996, the Company effected a 4-for-1 split as a share dividend
of common stock of the Company. All common share and per share amounts have
been adjusted retroactively to give effect to the share dividend. Additionally,
the Company's shareholders and board of directors approved an increase in the
number of authorized common shares of stock of the Company to 50,000,000. The
authorized number of common shares of stock of the Company have been adjusted to
give effect to this increase.

F-16

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

($ in thousands, except per share amounts)

(9) PROFIT SHARING PLANS

Microware has a noncontributory profit sharing plan for employees meeting
certain service requirements. Subject to certain limitations, annual
contributions to the noncontributory plan are determined by the board of
directors and are made in the form of Microware's common stock. The were no
annual contributions to the noncontributory plan for the years ended March 31,
1994, 1995, and 1996.

In addition, effective April 1, 1994, Microware established a contributory
profit sharing plan for substantially all full-time employees. Under the
contributory plan, Microware provides matching cash contributions based on
qualified employee contributions, as well as certain other contributions.
Microware's contributions to the contributory plan for the years ended March 31,
1995 and 1996 amounted to $49 and $88, respectively.

(10) FOREIGN OPERATIONS

A summary of the Company's domestic and foreign operations as of and for
the years ended March 31, 1994, 1995 and 1996 is presented below:

1994
------------------------------------------------------------------------------------
U.S. U.K. Japan France Eliminations Total
---- ---- ----- ------ ------------ -----
<S> <C> <C> <C> <C> <C> <C>
Revenues $ 9,035 $ 1,340 $ 5,426 $ 993 $ (1907) $ 14,887
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Operating profit (loss) $ 702 $ (186) $ (2,175) $ (205) $ (39) $ (1,903)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Net earnings (loss) $ 506 $ (203) $ (2,466) $ (223) $ (39) $ (2,425)
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Total assets $ 13,347 $ 290 $ 3,201 $ 493 $ (5,709) $ 11,622
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Total liabilities $ 3,318 $ 1,722 $ 5,689 $ 1,492 $ (5,488) $ 6,733
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------

1995
------------------------------------------------------------------------------------
U.S. U.K. Japan France Eliminations Total
---- ---- ----- ------ ------------ -----
Revenues $ 10,658 $ 2,567 $ 6,513 $ 1,592 $ (2,431) $ 18,899
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Operating (loss) profit $ (558) $ 288 $ 636 $ 69 $ (50) $ 385
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Net earnings $ 200 $ 264 $ 449 $ 58 $ (50) $ 921
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Total assets $ 14,974 $ 412 $ 3,519 $ 659 $ (7,440) $ 12,124
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Total liabilities $ 4,447 $ 1,643 $ 6,064 $ 1,618 $ (7,207) $ 6,565
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------

1996
------------------------------------------------------------------------------------
U.S. U.K. Japan France Eliminations Total
---- ---- ----- ------ ------------ -----
Revenues $ 13,377 $ 4,464 $ 7,309 $ 1,670 $ (3,165) $ 23,655
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Operating (loss) profit $ (558) $ 1,126 $ 661 $ (3) $ -- $ 1,226
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Net (loss) earnings $ (318) $ 1,000 $ 677 $ 17 $ -- $ 1,376
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Total assets $ 26,353 $ 1,189 $ 2,352 $ 641 $ (5,597) $ 24,938
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------
Total liabilities $ 4,435 $ 1,379 $ 1,390 $ 1,662 $ (2,471) $ 6,395
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------

</TABLE>

F-17

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

($ in thousands, except per share amounts)

(10) FOREIGN OPERATIONS, CONTINUED

Included in U.S. revenues are foreign export sales, primarily to Germany,
of approximately $1,680, $2,265, and $2,324 during the years ended March 31,
1994, 1995 and 1996, respectively. Revenue eliminations represent primarily
intercompany sales between the U.S. and foreign subsidiaries and royalties paid
to the U.S. by foreign subsidiaries.

(11) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

During the years ended March 31, 1994, 1995, and 1996, the Company paid
interest of approximately $343, $179, and $124, respectively.

Income taxes paid during the years ended March 31, 1994, 1995, and 1996
amounted to approximately $92, $-0-, and $168, respectively.

(12) SPECIAL CHARGES

During the years ended March 31, 1994 and 1995, the Company recorded
special charges in Japan of $530 and $166, respectively. No adjustments were
necessary to the liabilities recorded in 1994 and 1995, and all amounts were
paid as of March 31, 1995.

The 1994 charges relate primarily to the write off of inventory due to a
restructuring of operations and severance and related benefits for termination
of certain employees in Japan. The 1995 charges relate primarily to employee
severance and related benefits for resizing the operations in Japan.

(13) MOTOROLA STOCK AND WARRANT PURCHASE AGREEMENT

On July 31, 1995, the Company entered into a Stock and Warrant Purchase
Agreement (the Agreement) with Motorola, Inc. (Motorola) pursuant to which
Motorola purchased 1,526,232 common shares of stock of the Company for $12,100
($7.93 per share). In addition, pursuant to the Agreement, the Company issued
Motorola five separate warrants to purchase a total maximum of an additional
1,803,728 common shares of stock of the Company at an exercise price of $10.81
per share. The warrants are exercisable at various periods through July 31,
2001. The Agreement contains certain anti-dilution protection in the event of
certain dividends, stock splits, reclassifications, or issuances of common
shares of stock of the Company or rights thereto. In connection with the
Agreement, the Company delivered 1,373,608 common shares of stock of the Company
on July 31, 1995 for $10,890. The 152,624 deferred delivery common shares of
stock of the Company were delivered to Motorola on August 18, 1995 for $1,210.

F-18

<PAGE>

MICROWARE SYSTEMS CORPORATION AND SUBSIDIARIES

Notes to Consolidated Financial Statements, Continued

($ in thousands, except per share amounts)

(14) COMMITMENTS

The Company leases certain domestic and foreign facilities under
noncancelable operating leases. Minimum annual rental commitments at March 31,
1996 under all noncancelable operating leases are as follows:

1997 $ 858
1998 $ 637
1999 $ 187
2000 $ 108
2001 $ 100
Thereafter $ 755

Rental expense under cancelable and noncancelable operating leases was
$871, $786, and $950 during the years ended March 31, 1994, 1995 and 1996,
respectively.

(15) SUBSEQUENT EVENTS

Effective April 2, 1996, the Company completed an initial public offering
of its common stock (selling 2,000,000 new shares of common stock of the Company
and 500,000 shares offered by selling shareholders). The net proceeds to the
Company from the sale of the new 2,000,000 shares of common stock were
approximately $18,010 after deducting underwriting discounts and commissions and
estimated offering expenses. In connection with the initial public offering,
the 340,000 outstanding shares of Series A preferred stock were each converted
into 4 shares of common stock; for a total of 1,360,000 new shares of common
stock.

On May 9, 1996, the Company purchased approximately 17.5 acres of land for
approximately $2,100 on which the Company intends to construct an office
building accommodating 88,000 square feet of office space at an estimated cost
of $9,000 (including associated land).

F-19

<PAGE>

EXHIBITS

10.15 Real Estate Purchase Agreement between Charles I. Colby, Jr. and Patricia
E. Colby, Sellers, and Mid-America Investment Co., Buyer, dated November 21,
1995, with amendments, and Assignment and Conveyance of Interest from Mid-
America Investment Co. to the Company, dated May 9, 1996.

<PAGE>

REAL ESTATE PURCHASE AGREEMENT

CHARLES I. COLBY, JR. and PATRICIA E. COLBY, Sellers
MID-AMERICA INVESTMENT CO., Buyer

I. REAL ESTATE DESCRIPTION. The Buyer agrees to buy and the Sellers agree
to sell, in accordance with the provisions of this Agreement, real estate in
Polk County, Iowa, described follows:

Parcels 1, 2 and 3 outlined on Exhibit A
attached. Survey and legal description
to be provided at Seller's expense.

with any easements and appurtenant servient estates, but subject to the
following: (a) any zoning and other ordinances; (b) any covenants of record; and
(c) any easements of record for public utilities, roads and highways (the "Real
Estate").

II. PRICE. The purchase price shall be $1,360,000, payable as follows:

$20,000 earnest money with this Offer. The balance in cash at closing.

III. REAL ESTATE TAXES. Sellers shall pay 1995/1996 taxes payable in
1996/1997 prorated to date of closing and any unpaid real estate taxes payable
in prior years. Buyer shall pay all subsequent real estate taxes. Proration of
real estate taxes on the Real Estate on the closing statement shall be based
upon such taxes for the year currently payable. Buyer may require a post
closing adjustment so that such proration is based upon taxes actually payable.

IV. SPECIAL ASSESSMENTS. Sellers shall pay all special assessments which are
a lien on the Real Estate as of the date of this Agreement and for all special
assessment projects now completed or in progress, including sewer trunk lines,
water lines and University Avenue widening including paving, whether or not a
lien at the time of closing. All other special assessments shall be paid by
Buyer.

V. RISK OF LOSS AND INSURANCE. Sellers shall maintain existing fire,
windstorm and extended coverage insurance on the existing structures located on
the Real Estate until possession is given to Buyer and shall promptly secure
endorsements to the appropriate insurance policies naming Buyer as additional
insured as its interests may appear. Risk of loss to such structures from such
insured hazards shall be on Buyer after Sellers have performed under this
paragraph and notified Buyer of such performance. All other risks of loss (such
as uninsured losses and losses to trees) remain upon Seller until closing. In
the event of such other losses, the sole remedy of Buyer shall be rescission of
this Agreement.

VI. CARE AND MAINTENANCE. The Real Estate shall be preserved in its present
condition and delivered intact at the time possession is delivered to Buyer,
provided, however, if there is loss or destruction of all or any part of the
Real Estate from causes covered by the insurance maintained by Sellers, Buyer
agrees to accept such damaged or destroyed Real Estate together with such
insurance proceeds in lieu of the Real Estate in its present condition and
Sellers shall not be required to repair or replace same.

VII. POSSESSION AND CLOSING. If Buyer timely performs all obligations, and
all conditions are satisfied, closing shall occur and possession of

<PAGE>

the Real Estate shall be delivered to Buyer on April 30, 1996 or earlier at
Buyer's option. In no event shall Sellers be required to delay closing beyond
April 30, 1996.

VIII. FIXTURES. All property that integrally belongs to or is part of the Real
Estate, whether attached or detached, such as light fixtures, shades, rods,
blinds, awnings, windows, storm doors, screens, plumbing fixtures, water
heaters, water softeners, automatic heating equipment, air conditioning
equipment, wall to wall carpeting, built-in items and electrical service cable,
outside television towers and antenna, fencing, gates and landscaping shall be
considered a part of Real Estate and included in the sale.

IX. USE OF PURCHASE PRICE. At time of settlement, funds of the purchase
price may be used to pay taxes and other liens and to acquire outstanding
interests, if any, of others.

X. ABSTRACT AND TITLE. Sellers, at their expense, shall promptly obtain an
abstract of title to the Real Estate continued through the date of acceptance of
this offer, and deliver it to Buyer for examination. It shall show merchantable
title in Sellers in conformity with this agreement, Iowa law and Title Standards
of the Iowa State Bar Association. The abstract shall become the property of
the Buyer when the purchase price is paid in full. Sellers shall pay the costs
of any additional abstracting and title work due to any act or omission of
Sellers, including transfers by or the death of Sellers or their assignees.

XI. DEED. Upon payment of the purchase price, Sellers shall convey the Real
Estate to Buyer or its assignees, by warranty deed, free and clear of all liens,
restrictions, and encumbrances except as otherwise provided in this Agreement.
Any general warranties of title shall extend only to the time of acceptance of
this offer, with special warranties as to acts of Sellers continuing up to time
of delivery of the deed.

XII. TIME IS OF THE ESSENCE. Time is of the essence in this contract.

XIII. REMEDIES OF THE PARTIES.

A. If Buyer fail to timely perform this contract, Sellers may forfeit
it as provided in the Iowa Code, except that the thirty day period set
forth in section 656.2 shall be extended to sixty days, and all payments
made shall be forfeited or, at Sellers' option, upon sixty days written
notice of intention to accelerate the payment of the entire balance
because of such failure (during which sixty days such failure is not
corrected) Sellers may declare the entire balance immediately due and
payable. Thereafter this contract may be foreclosed in equity and the
Court may appoint a receiver.

B. If Sellers fail to timely perform this contract, Buyer has the right
to have all payments made returned to it.

C. Buyer and Sellers also are entitled to utilize any and all other
remedies or actions at law or in equity available to them and shall be
entitled to obtain judgment for costs and attorney fees as permitted by
law.

XIV. CONTRACT BINDING ON SUCCESSORS IN INTEREST. This contract shall apply to
and bind the successors in interest of the parties.

XV. CONSTRUCTION. Words and phrases shall be construed as in the singular or
plural number, and as masculine, feminine or neuter gender, according to the
context.

<PAGE>

XVI. GROUNDWATER HAZARD STATEMENT. Attached to this Agreement is the form of
Groundwater Hazard Statement which Sellers shall execute and deliver to Buyer at
closing. Buyer also acknowledges the existence of septic tanks in the Real
Estate.

XVII. ENVIRONMENTAL MATTERS. Buyer may at its expense within 30 days after the
date of this Purchase Agreement have the Real Estate inspected for the presence
or suspected presence of any substances coming within the definition of
hazardous wastes or substances, pollutants or contaminants under any state or
federal law, rule, or regulation, including without limitation asbestos and
polychlorinated biphenyls; or the presence of any underground storage tanks. If
any such substances, pollutants, contaminants or underground storage tanks are
found then this Agreement may be terminated at the Buyer's option and, upon
written notice of termination, any earnest money shall be returned to Buyer and,
upon such return neither party shall have any further rights or obligations with
respect to this Agreement. Except for the statements as to Sellers' knowledge
contained in the Groundwater Hazard Statement, Sellers make no warranties or
representations, either express or implied, regarding the physical condition of
the Real Estate, including but not limited to the presence or absence of any
material or substance upon, within or under the Real Estate. Buyer accepts the
Real Estate in "as is" condition with all faults, known and unknown, and accepts
all risks of underground tanks, toxic waste, groundwater contamination,
asbestos, and all other matters with respect to the physical condition of the
Real Estate. From and after the date of closing, Buyer shall indemnify, defend
and hold Sellers harmless from and against any claims by any governmental agency
or private person or entity pertaining to the physical condition of the Real
Estate, including but not limited to all claims for testing, monitoring,
remediation, damages to person or property, fines, penalties, and including all
reasonable expenses incurred by Sellers with respect to any such claim.

XVIII. CONDITIONS OF CLOSING-BUYER.

A. This Purchase Agreement shall be subject to Buyer obtaining all
zoning, tax abatement building permits and any other governmental
approvals necessary to build an 80,000 square foot office building on
Parcel 3 outlined on Exhibit A. Said approval shall be in the form and
content acceptable to Buyer, at Buyer's sole discretion, or Buyer may
declare this Purchase Agreement null and void and of no further force and
effect and all earnest money shall immediately be refunded to Buyer. All
said approvals shall be received on or before April 1, 1996.

B. This Purchase Agreement is subject to the satisfactory negotiation
and completion of a lease agreement between Buyer and Microware, Inc..
All terms and conditions of said lease agreement and the adequacy thereof
shall be in Buyer's sole discretion. In the event the lease agreement
referenced herein is not satisfactory to Buyer, the Buyer may declare
this Purchase Agreement null and void and of no further force and effect
and immediately have its earnest money returned hereunder.

By proceeding with closing, Buyer waives any conditions set forth in (a)
or (b) above which are then unsatisfied.

XIX. LAKE CROSSING ACCESS. Prior to closing, Buyer and Sellers shall
determine whether the City of Clive will require, in connection with Buyer's
platting of the Real Estate or in connection with the platting

<PAGE>

of Hickory Hills Plat 2, the construction of a different lake crossing access
from that currently existing at the southerly "finger" of the lake. Sellers or
their representative shall prepare all submissions to the City regarding the
necessity for such crossing and regarding the design of such crossing and shall
be invited to attend all meetings at which such crossing or the necessity
therefor is discussed. After approval from the City of the design of such lake
crossing access, if such construction is required by the City in connection with
Buyer's plat or in connection with the platting of Hickory Hills Plat 2, then at
closing $200,000 of the purchase price shall be placed in escrow and subject to
weather conditions, Sellers shall commence construction of such lake crossing
access promptly after closing and shall complete such construction within nine
months. Upon completion of such construction by Sellers the escrow agent shall
pay the entire escrow amount to Sellers. In the event the construction of the
lake crossing access is not so required by the City of Clive in connection with
Buyer's plat or in connection with the platting of Hickory Hills Plat 2, then
Sellers shall have no further obligations under this paragraph, and in such
event the purchase price shall be reduced by $100,000. In the event Sellers
default in the performance of their obligations under this paragraph, the escrow
agent shall apply the escrow deposit to the costs of completing such
construction and, to the extent such deposit is not required to pay such costs
of completing such construction, the escrow agent shall pay over the unused
portion of the escrow deposit to Sellers.

XX. OTHER AGREEMENT. This Agreement is executed contemporaneously with the
execution of a Real Estate Purchase Agreement for the purchase by Buyer of the
real estate designated Parcel 4 on Exhibit A. Closing under this Agreement
shall occur contemporaneously with closing under such other agreement. If
closing does not occur for any reason under such other agreement, then closing
shall not occur under this Agreement which shall then stand rescinded.

XXI. LEASE. At closing, Sellers and Buyer shall enter into a lease of the
house and caretaker house located on Parcel 1 and Parcel 2 from Buyer to Sellers
in the form acceptable to Sellers and Buyer providing for a term of one year
with Sellers' option to terminate at the end of any calendar month and with rent
of $2,000 per month, payment of utilities and insurance by Sellers, payment of
property taxes by Buyer, the payment of significant repair and maintenance by
Buyer and the payment of routine maintenance (not to exceed $2,000 during the
one year term) by Sellers.

XXII. COMMISSIONS. Upon receipt of the purchase price from Buyer, Sellers
shall pay to Coldwell Banker Mid-America Group, Realtors, a commission in the
amount of $80,000.

XXII. CONDITIONS OF CLOSING - SELLERS. Sellers obligation to close shall be
subject to the following conditions:

A. Sellers' approval of Buyer's site plan for the development of
Parcels 1, 2, 3 and 4 and the construction of buildings and improvements
thereon, which approval shall not be unreasonably withheld based upon the
effect upon Hickory Hills Plat 2 and Parcel 1.

B. Parcel 1 shall be zoned for detached single family residence use
only and a covenant restricting the use of Parcel 1 for such

<PAGE>

use shall be executed and recorded at closing. Such covenant shall be
for the benefit of Hickory Hills Plat 2.

C. (1) Parcel 2 shall be zoned for single family residence use only,
including attached townhomes, and a covenant restricting the use of
Parcel 2 for such use shall be executed and recorded at closing. Such
covenant shall be for the benefit of Hickory Hills Plat 2 and for the
benefit of Parcel 1. (2) Alternatively, at Buyer's election, Parcel 2
may be used for parking area in connection with the commercial
development of Parcel 3. If Buyer does not exercise this election on or
before closing, then (1) above shall apply. If Buyer exercises this
election, then Buyer shall submit for Seller's approval prior to closing
a green space buffer landscaping plan to shield such parking area from
the view of Parcel 1 and from the view of Hickory Hills Plat 2, and a
covenant requiring the construction and maintenance of such green space
buffer landscaping shall be executed and recorded at closing. At a
minimum, such green space buffer landscaping plan shall provide for (A) a
75 foot wide green space buffer between the western boundary of Parcel 2
and the western edge of the parking area, (B) a 75 foot wide green space
buffer between the northern boundary of Parcel 2 and the northern edge of
the parking area, (C) the retention of all trees now located within such
green space buffer areas, (D) additional plantings to shield
substantially the view of the parking area from Hickory Hills Plat 2 and
from Parcel 1. In addition to the foregoing, such covenant shall provide
for the following: (i) landscaped islands within the parking area to
minimize the view of parked cars from Hickory Hills Plat 2 and from
Parcel 1, (ii) a maximum light pole height of 25 feet, (iii) low cut off
lighting fixtures to minimize the view of parking lot lighting from
Hickory Hills Plat 2 and from Parcel 1, and (iv) entrances and exits to
and from the parking area at the east side only. Such covenant shall be
for the benefit of Hickory Hills Plat 2 and for the benefit of Parcel 1.
Attached hereto is a drawing indicating the general locations of such
green space buffer.

D. A covenant restricting the height of any building located on Parcel
3 shall be executed and recorded at closing. The maximum height shall be
the elevation of two stories at the highest point of Parcel 3. Such
covenant shall be for the benefit of Hickory Hills Plat 2, Parcel 1, and
Parcel 2.

E. A covenant shall be executed and recorded at closing which shall
provide for (A) a 75 foot wide green space buffer extending west from the
western edge of the building to be constructed upon Parcel 3 and from the
northwest corner of the building in a 75 foot radius, and the retention
of all trees now located within such green space buffer area, (B) a green
space buffer between the northern edge of the building to be constructed
upon Parcel 3 and the lake, with the width of buffer area to be not less
than 150 feet at the northwest corner of the building and the retention
of all trees now located within such green space buffer area, (C) the
color of the building exterior to be an earth tone in order to minimize
visibility from the real estate located within Hickory Hills Plat 2, and
(D) the prohibition of signage on the building which would be visible
from Hickory Hills Plat 2. Such covenant

<PAGE>

shall be for the benefit of Hickory Hills Plat 2. Attached hereto is a
drawing indicating the general locations of such green space buffer.

F. Covenants shall be executed and recorded with respect to Parcels 1,
2, 3 and 4 so that the owners of such parcels shall be members of an
association to be formed, to include the real estate west of the lake,
for the purpose of maintaining the lake, the shoreline, the dam and the
creek entry into the lake; such covenants to include provisions for
assessments for maintenance of the lake and restrictions on use of the
lake. Such covenants will prohibit docks in the lake; accordingly
Sellers may remove at any time before or after closing the dock extending
from Parcel 1 into the lake.

G. Covenants shall be executed and recorded so that the owners from
time to time of Parcels 1, 2 and 3 shall jointly be responsible for the
maintenance of the lake crossing access to be installed by Sellers and
described in Paragraph 19 above.

MID-AMERICA INVESTMENT CO.

By /s/ Michael Kuperman /s/ Charles I. Colby, Jr.
--------------------------- ----------------------------------
11/21/95 President Charles I. Colby, Jr.

/s/ Patricia E. Colby
----------------------------------
Patricia E. Colby

<PAGE>

AMENDMENT TO REAL ESTATE PURCHASE AGREEMENT

This Amendment to Real Estate Purchase Agreement made and entered into as of
this 30th day of April 1996, by and between Charles I. Colby, Jr. and Patricia
E. Colby, Sellers, and Mid-America Investment Co., Buyer.
WITNESSETH:

WHEREAS, the parties hereto have made and entered into a Real Estate Purchase
Agreement dated the 21st day of November, 1995, for the sale of real estate
located in Clive, Polk County, Iowa, and;

WHEREAS, paragraph 7 of said Agreement provides, "If Buyer timely performs all
obligations, and all conditions are satisfied, closing shall occur and
possession of the Real Estate shall be delivered to Buyer on April 30, 1996 or
earlier at Buyer's option. In no event shall Sellers be required to delay
closing beyond April 30, 1996.", and;

WHEREAS, the parties hereto desire to amend said Agreement as follows:

NOW THEREFORE, for good and valuable consideration, the parties hereto do now
hereby amend said Agreement as follows:

A. Paragraph 2 is amended by changing the purchase price to $1,285,000.

B. Paragraph 7 is amended by striking the date April 30, 1996 in both
places where it appears, and by inserting therein in both places the
following

"May 9, 1996"

C. Paragraph 18(a) is stricken in its entirety. Buyer agrees that all
conditions previously stated in paragraph 18(a) have been satisfied or
are hereby waived. The conditions stated in paragraph 18(b) remain
conditions of closing and the term "lease" therein is changed to the term
"consulting agreement."

D. Paragraph 19 is amended by deleting the entire paragraph and
inserting the following:

19. LAKE CROSSING ACCESS. Construction of a lake crossing
access (24 feet wide asphalt) is now in process over the southerly
"finger" of the lake. Seller shall cause such construction to be
promptly completed in accordance with such requirements without cost
to Buyer.

Except as herein modified said Agreement remains in full force and effect by and
between the parties hereto.

MID-AMERICA INVESTMENT CO.

By /s/ Michael Kuperman /s/ Charles I. Colby, Jr.
-------------------------------- ----------------------------------
President Charles I. Colby, Jr.

/s/ Patricia E. Colby
----------------------------------
Patricia E. Colby

<PAGE>

ASSIGNMENT AND CONVEYANCE OF INTEREST

KNOW ALL MEN BY THESE PRESENTS:

THAT WHEREAS, Mid-America Investment Co., an Iowa corporation, hereinafter
referred to as "Mid-America" as Buyer, has made and entered into a Real Estate
Purchase Agreement in which Charles I. Colby, Jr. and Patricia E. Colby, husband
and wife, are Sellers for real estate in Polk County, Iowa, legally described on
Exhibit A hereto attached and by this reference made a part hereof, which Real
Estate Purchase Agreement was dated November 21, 1995 and was amended by an
Amendment dated as of the 30th day of April, 1996, which Agreement as amended is
hereinafter referred to as "Real Estate Purchase Agreement"; and

WHEREAS, Mid-America as Buyer in said Real Estate Purchase Agreement desires to
assign all of its rights, title and interest in and to said Real Estate Purchase
Agreement, and its rights, title and interest in and to the real estate
described in said Real Estate Purchase Agreement, and all of its obligations
under said Real Estate Purchase Agreement to Microware Systems Corporation, an
Iowa corporation, hereinafter sometimes referred to as "Microware", and
Microware is willing to accept such an Assignment and is willing to assume all
such obligations; and

WHEREAS, the Sellers in said Real Estate Purchase Agreement are willing to
consent that said Assignment and acceptance be made and executed.

NOW THEREFORE, in consideration of the premises and the sum of $1.00 and other
good and valuable consideration as hereinafter expressed, including the consent
of the Sellers under said Real Estate Purchase Agreement as hereinafter set
forth on this Assignment, Mid-America does hereby quit claim, sell, assign,
transfer and convey all of its rights, title and interest in and to the Real
Estate Purchase Agreement hereinabove set forth, and all of its right, title and
interest in and to the real estate described in said Real Estate Purchase
Agreement to Microware Systems Corporation, an Iowa corporation, with its
corporate headquarters located at 1900 NW 114th Street, Des Moines, Iowa 50325-
7077, which by acceptance of this Assignment agrees to perform all of the
obligations by Mid-America agreed to be performed and make all payments to be
made by Mid-America.

Microware Systems Corporation hereby accepts the above and foregoing Assignment
from Mid-America and does hereby agree to make all payments and perform all
obligations required of Mid-America under the Real Estate Purchase Agreement
hereinabove referred to.

IN WITNESS WHEREOF, this Assignment has been executed this 9th day of May,
1996.

Microware Systems Corporation Mid-America Investment Co.

/s/ George J. Barry /s/ Michael Kuperman
- -------------------------------- ----------------------------------
George J. Barry CFO, VP Michael Kuperman, President

STATE OF IOWA )
) SS.
COUNTY OF POLK )

On this 9th day of May, 1996, before me, a Notary Public in and for said
county, personally appeared Kenneth B. Kaplan, to me personally

<PAGE>

known, who being by me duly sworn did say that that person is President of said
corporation, that (the seal affixed to said instrument is the seal of said or no
seal has been procured by the said) corporation and that said instrument was
signed and sealed on behalf of the said corporation by authority of its board of
directors and the said Kenneth B. Kaplan acknowledged the execution of said
instrument to be the voluntary act and deed of said corporation by it
voluntarily executed.

---------------------------------------
Notary Public in the State of Iowa.

STATE OF IOWA )
) SS.
COUNTY OF POLK )

On this _____ day of May, 1996, before me, a Notary Public in and for said
county, personally appeared Michael Kuperman, to me personally known, who being
by me duly sworn did say that that person is President of said corporation, that
no seal has been procured by the said corporation and that said instrument was
signed on behalf of the said corporation by authority of its board of directors
and the said Michael Kuperman acknowledged the execution of said instrument to
be the voluntary act and deed of said corporation by it voluntarily executed.

---------------------------------------
Notary Public in the State of Iowa.

CONSENT TO ASSIGNMENT

COMES NOW, Charles I. Colby, Jr. and Patricia E. Colby, husband and wife,
Sellers, referred to in the above and foregoing Assignment and hereby consents
that said Assignment be executed and delivered and does hereby agree to accept
Microware Systems Corporation as Buyer under said Real Estate Purchase Agreement
with all of the rights, title and interest of Mid-America Investment Co. under
said Real Estate Purchase Agreement, and to the real estate therein involved,
and upon execution of this Consent, do hereby release Mid-America Investment Co.
from all obligations under this Real Estate Purchase Agreement hereinabove
referred to in this Assignment.

Dated this 9th day of May, 1996.

/s/ Charles I. Colby, Jr. /s/ Patricia E. Colby
- ---------------------------------- ----------------------------------
Charles I. Colby, Jr. Patricia E. Colby

STATE OF IOWA )
) SS.
COUNTY OF POLK )

On this _____ day of May, 1996, before me, a Notary Public, personally appeared
Charles I. Colby, Jr. and Patricia E. Colby, husband and wife, to me known to be
the persons named in and who executed the

<PAGE>

foregoing instrument, and acknowledged that they executed the same as their
voluntary act and deed.

---------------------------------------
Notary Public in the State of Iowa.

<PAGE>

10.16 Real Estate Purchase Agreement between Charles I. Colby, III and Victoria
R. Colby, Sellers, and Mid-America Investment Co., Buyer, dated November 21,
1995, with amendments, and Assignment and Conveyance of Interest from Mid-
America Investment Co. to the Company, dated May 9, 1996.

<PAGE>

REAL ESTATE PURCHASE AGREEMENT

CHARLES I. COLBY, III and VICTORIA R. COLBY, Sellers
MID-AMERICA INVESTMENT CO., Buyer

I. REAL ESTATE DESCRIPTION. The Buyer agrees to buy and the Sellers agree to
sell, in accordance with the provisions of this Agreement, real estate in Polk
County, Iowa, described follows:
Parcel 4 outlined on Exhibit A attached. Survey and
legal description to be provided at Seller's expense.
with any easements and appurtenant servient estates, but subject to the
following: (a) any zoning and other ordinances; (b) any covenants of record; and
(c) any easements of record for public utilities, roads and highways (the "Real
Estate").

II. PRICE. The purchase price shall be $340,000, payable as follows:
$5,000 earnest money with this Offer. The balance in cash at closing.

III. REAL ESTATE TAXES. Sellers shall pay 1995/1996 taxes payable in 1996/1997
prorated to date of closing and any unpaid real estate taxes payable in prior
years. Buyer shall pay all subsequent real estate taxes. Proration of real
estate taxes on the Real Estate on the closing statement shall be based upon
such taxes for the year currently payable. Buyer may require a post closing
adjustment so that such proration is based upon taxes actually payable.

IV. SPECIAL ASSESSMENTS. Sellers shall pay all special assessments which are a
lien on the Real Estate as of the date of this Agreement and for all special
assessment projects now completed or in progress, including sewer trunk lines,
water lines and University Avenue widening including paving, whether or not a
lien at the time of closing. All other special assessments shall be paid by
Buyer.

V. RISK OF LOSS AND INSURANCE. Sellers shall maintain existing fire,
windstorm and extended coverage insurance on the existing structures located on
the Real Estate until possession is given to Buyer and shall promptly secure
endorsements to the appropriate insurance policies naming Buyer as additional
insured as its interests may appear. Risk of loss to such structures from such
insured hazards shall be on Buyer after Sellers have performed under this
paragraph and notified Buyer of such performance. All other risks of loss (such
as uninsured losses and losses to trees) remain upon Seller until closing; in
the event of such other losses, the sole remedy of Buyer shall be rescission of
this Agreement.

VII. POSSESSION AND CLOSING. If Buyer timely performs all obligations, and all
conditions are satisfied, closing shall occur and possession of the Real Estate
shall be delivered to Buyer on April 30, 1996 or earlier

<PAGE>

at Buyer's option. In no event shall Sellers be required to delay closing
beyond April 30, 1996.

IX. USE OF PURCHASE PRICE. At time of settlement, funds of the purchase price
may be used to pay taxes and other liens and to acquire outstanding interests,
if any, of others.

XII. TIME IS OF THE ESSENCE. Time is of the essence in this contract.

XIII. REMEDIES OF THE PARTIES.

A. If Buyer fail to timely perform this contract, Sellers may forfeit it
as provided in the Iowa Code, except that the thirty day period set forth
in section 656.2 shall be extended to sixty days, and all payments made
shall be forfeited or, at Sellers' option, upon sixty days written notice
of intention to accelerate the payment of the entire balance because of
such failure (during which sixty days such failure is not corrected)
Sellers may declare the entire balance immediately due and payable.
Thereafter this contract may be foreclosed in equity and the Court may
appoint a receiver.

B. If Sellers fail to timely perform this contract, Buyer has the right
to have all payments made returned to it.

XIV. CONTRACT BINDING ON SUCCESSORS IN INTEREST. This contract shall apply to
and bind the successors in interest of the parties.

XV. CONSTRUCTION. Words and phrases shall be construed as in the singular or
plural number, and as masculine, feminine or neuter gender, according to the
context.

<PAGE>

XVIII. OTHER AGREEMENT. This Agreement is executed contemporaneously with the
execution of a Real Estate Purchase Agreement for the purchase by Buyer of the
real estate designated Parcels 1, 2 and 3 on Exhibit A. Closing under this
Agreement shall occur contemporaneously with closing under such other agreement.
If closing does not occur for any reason under such other agreement, then
closing shall not occur under this Agreement which shall then stand rescinded.

XIX. COMMISSIONS. Upon receipt of the purchase price from Buyer, Sellers shall
pay to Coldwell Banker Mid-America Group, Realtors, a commission in the amount
of $20,000.

MID-AMERICA INVESTMENT CO.

By /s/ Michael Kuperman /s/ Charles I. Colby, III
--------------------------------- ---------------------------------------
11/21/95 President Charles I. Colby, III

/s/ Victoria R. Colby
---------------------------------------
Victoria R. Colby

<PAGE>

AMENDMENT TO REAL ESTATE PURCHASE AGREEMENT

This Amendment to Real Estate Purchase Agreement made and entered into as of
this 30th day of April 1996, by and between Charles I. Colby, III and Victoria
R. Colby, Sellers, and Mid-America Investment Co., Buyer.

WITNESSETH:

WHEREAS, the parties hereto have made and entered into a Real Estate Purchase
Agreement dated the 21st day of November, 1995, for the sale of real estate
located in Clive, Polk County, Iowa, and;

WHEREAS, the parties hereto desire to amend said Agreement as follows:

A. Paragraph 7 is amended by striking the date April 30, 1996 in both
places where it appears, and by inserting therein in both places the
following

"May 9, 1996"

B. the following new paragraph is added:

20. TAX FREE EXCHANGE. In the event of the assignment by Seller
of this agreement to a qualified intermediary as set forth in
regulations issued pursuant to Section 1031 of the Internal Revenue
Code of 1986, all payments to be made by Buyer under this Agreement
shall be made to or as directed by the qualified intermediary in
order to permit the premises to constitute relinquished property in
a tax free exchange by Seller. Buyer shall cooperate with Seller
by executing such other documents as may be reasonably required in
connection with such exchange provided that Buyer shall not be
required to incur any additional costs in connection therewith and
provided further that Buyer shall not be required to accept title
to any real estate other than the premises.

Except as herein modified said Agreement remains in full force and effect by and
between the parties hereto.

MID-AMERICA INVESTMENT CO.

By /s/ Michael Kuperman /s/ Charles I. Colby, III
--------------------------------- ---------------------------------------
President Charles I. Colby, III

/s/ Victoria R. Colby
---------------------------------------
Victoria R. Colby

<PAGE>

ASSIGNMENT AND CONVEYANCE OF INTEREST

KNOW ALL MEN BY THESE PRESENTS:

THAT WHEREAS, Mid-America Investment Co., an Iowa corporation, hereinafter
referred to as "Mid-America" as Buyer, has made and entered into a Real Estate
Purchase Agreement in which Charles I. Colby, III and Victoria R. Colby, husband
and wife, are Sellers for real estate in Polk County, Iowa, legally described on
Exhibit A hereto attached and by this reference made a part hereof, which Real
Estate Purchase Agreement was dated November 21, 1995 and was amended by an
Amendment dated as of the 30th day of April, 1996, which Agreement as amended is
hereinafter referred to as "Real Estate Purchase Agreement"; and

WHEREAS, the Sellers in said Real Estate Purchase Agreement are willing to
consent that said Assignment and acceptance be made and executed.

IN WITNESS WHEREOF, this Assignment has been executed this 9th day of May,
1996.

Microware Systems Corporation Mid-America Investment Co.

/s/ George J. Barry /s/ Michael Kuperman
- ----------------------------------- ---------------------------------------
George J. Barry CFO, VP Michael Kuperman, President

STATE OF IOWA )
) SS.
COUNTY OF POLK )

On this __________ day of May, 1996, before me, a Notary Public in and for said
county, personally appeared Kenneth B. Kaplan, to me personally

<PAGE>

---------------------------------------
Notary Public in the State of Iowa.
STATE OF IOWA )
) SS.
COUNTY OF POLK )

On this day of May, 1996, before me, a Notary Public in and for said
county, personally appeared Michael Kuperman, to me personally known, who being
by me duly sworn did say that that person is President of said corporation, that
no seal has been procured by the said corporation and that said instrument was
signed on behalf of the said corporation by authority of its board of directors
and the said Michael Kuperman acknowledged the execution of said instrument to
be the voluntary act and deed of said corporation by it voluntarily executed.

---------------------------------------
Notary Public in the State of Iowa.

CONSENT TO ASSIGNMENT

COMES NOW, Charles I. Colby, III and Victoria R. Colby, husband and wife,
Sellers, referred to in the above and foregoing Assignment and hereby consents
that said Assignment be executed and delivered and does hereby agree to accept
Microware Systems Corporation as Buyer under said Real Estate Purchase Agreement
with all of the rights, title and interest of Mid-America Investment Co. under
said Real Estate Purchase Agreement, and to the real estate therein involved,
and upon execution of this Consent, do hereby release Mid-America Investment Co.
from all obligations under this Real Estate Purchase Agreement hereinabove
referred to in this Assignment.
Dated this 9th day of May, 1996.

/s/ Charles I. Colby, III /s/ Victoria R. Colby
- ----------------------------------- ---------------------------------------
Charles I. Colby, III Victoria R. Colby

STATE OF IOWA )
) SS.
COUNTY OF POLK )

On this day of May, 1996, before me, a Notary Public, personally
appeared Charles I. Colby, III and Victoria R. Colby, husband and wife, to me
known to be the persons named in and who executed the foregoing instrument, and
acknowledged that they executed the

<PAGE>

same as their voluntary act and deed.

---------------------------------------
Notary Public in the State of Iowa.

<PAGE>

10.17 Real Estate Purchase Agreement between Mid-America Investment Co. and
the Company, dated May 9, 1996.

<PAGE>

REAL ESTATE PURCHASE AGREEMENT

MID-AMERICA INVESTMENT CO., an Iowa corporation, with its corporate headquarters
located at Regency West 4, 4700 Westown Parkway, Suite 303, West Des Moines,
Iowa 50266-6728, Seller

MICROWARE SYSTEMS CORPORATION, an Iowa corporation, with its corporate
headquarters located at 1900 NW 114th Street, Des Moines, Iowa 50325-7077, Buyer

1. REAL ESTATE DESCRIPTION. The Buyer agrees to buy and the Seller agrees to
sell, in accordance with the provisions of this Agreement, real estate in Polk
County, Iowa, described as follows:

3.801 acres as legally described on Exhibit A hereto
attached and by this reference made a part hereof.

with any easements and appurtenant servient estates, but subject to the
following: (a) any zoning and other ordinances; (b) any covenants of record; (c)
any easements of record for public utilities, roads and highways (the "Real
Estate").

2. PRICE. The purchase price shall be $496,714.68, which is $3.00 per square
foot for 165,571.56 square feet in said parcel, payable as follows:

$496,714.68 in cash at closing.

3. REAL ESTATE TAXES. Seller shall pay 1995/1996 taxes payable in 1996/1997
prorated to date of closing and any unpaid real estate taxes payable in prior
years. Buyer shall pay all subsequent real estate taxes. Proration of real
estate taxes on the Real Estate on the closing statement shall be based upon
such taxes for the year currently payable. Buyer may require a post closing
adjustment so that such proration is based upon taxes actually payable.

4. SPECIAL ASSESSMENTS. Seller shall pay all special assessments which are a
lien on the Real Estate as of the date of this Agreement and for all special
assessment projects now completed or in progress, including sewer trunk lines,
water lines and University Avenue widening including paving, whether or not a
lien at the time of closing. All other special assessments shall be paid by
Buyer.

5. RISK OF LOSS AND INSURANCE. Seller shall maintain existing fire, windstorm
and extended coverage insurance on any existing structures located on the Real
Estate until possession is given to Buyer and shall promptly secure endorsements
to the appropriate insurance policies naming Buyer as additional insured as its
interests may appear. Risk of loss to any such structures from such insured
hazards shall be on Buyer after Sellers have performed under this paragraph and
notified Buyer of such performance. All other risks of loss (such as uninsured
losses and losses to trees) remain upon Seller until closing.

6. CARE AND MAINTENANCE. The Real Estate shall be preserved in its present
condition and delivered intact at the time possession is delivered to Buyer,
provided, however, if there is loss or destruction of all or any part of the
Real Estate from causes covered by the insurance maintained by Seller, Buyer
agrees to accept such damaged or destroyed Real Estate together with such
insurance proceeds in lieu of the Real Estate in its present condition and
Seller shall not be required to repair or replace same.

<PAGE>

7. POSSESSION AND CLOSING. If Buyer timely performs all obligations, and all
conditions are satisfied, closing occur and possession of the Real Estate shall
be delivered to Buyer on or before May 9, 1996 or earlier at Buyer's option. In
no event shall Seller be required to delay closing beyond May 9, 1996.

8. FIXTURES. All property that integrally belongs to or is part of the Real
Estate, whether attached or detached, such as light fixtures, shades, rods,
blinds, awnings, windows, storm doors, screens, plumbing fixtures, water
heaters, water softeners, automatic heating equipment, air conditioning
equipment, wall to wall carpeting, built-in items and electrical service cable,
outside television towers and antenna, fencing, gates and landscaping shall be
considered a part of Real Estate and included in the sale.

9. USE OF PURCHASE PRICE. At time of settlement, funds of the purchase price
may be used to pay taxes and other liens and to acquire outstanding interests,
if any, of others.

10. ABSTRACT AND TITLE. Seller, at their expense, shall promptly obtain an
abstract of title to the Real Estate continued through the date of acceptance of
this offer, and deliver it to Buyer for examination. It shall show merchantable
title in Seller in conformity with this agreement, Iowa law and Title Standards
of the Iowa State Bar Association. The abstract shall become the property of
the Buyer when the purchase price is paid in full. Seller shall pay the costs
of any additional abstracting and title work due to any act or omission of
Seller, including transfers by or the death of Seller or their assignees.

11. DEED. Upon payment of the purchase price, Seller shall convey the Real
Estate to Buyer or their assignees, by warranty deed, free and clear of all
liens, restrictions, and encumbrances except as provided in this Agreement. Any
general warranties of title shall extend only to the time of acceptance of this
offer, with special warranties as to acts of Seller continuing up to time of
delivery of the deed.

12. TIME IS OF THE ESSENCE. Time is of the essence in this contract.

13. REMEDIES OF THE PARTIES.

(a) If Buyer fail to timely perform this contract, Seller may forfeit it as
provided in the Iowa Code, and all payments made shall be forfeited or, at
Seller option, upon thirty days written notice of intention to accelerate the
payment of the entire balance because of such failure (during which thirty days
such failure is not corrected) Seller may declare the entire balance immediately
due and payable. Thereafter this contract may be foreclosed in equity and the
Court may appoint a receiver.

(b) If Seller fail to timely perform this contract, Buyer have the right to
have all payments made returned to them.

(c) Buyer and Seller also are entitled to utilize any and all other remedies or
actions at law or in equity available to them and shall be entitled to obtain
judgment for costs and attorney fees as permitted by law.

14. CONTRACT BINDING ON SUCCESSORS IN INTEREST. This contract shall apply to
and bind the successors in interest of the parties. Buyer may not assign the
contract without consent of Seller, which consent shall not be unreasonably
withheld.

<PAGE>

15. CONSTRUCTION. Words and phrases shall be construed as in the singular or
plural number, and as masculine, feminine or neuter gender, according to the
context.

16. GROUNDWATER HAZARD STATEMENT. Attached to this Agreement is the form of
Groundwater Hazard Statement which Seller shall execute and deliver to Buyer at
closing.

17. ENVIRONMENTAL MATTERS. Buyer has received from Seller all of Seller's
information as to the environmental condition of the property and accepts the
Real Estate in "as is" condition with all faults, known and unknown, and accepts
all risks of underground tanks, toxic waste, groundwater contamination,
asbestos, and all other matters with respect to the physical condition of the
Real Estate. From and after the date of closing, Buyer shall indemnify, defend
and hold Sellers harmless from and against any claims by any governmental agency
or private person or entity pertaining to the physical condition of the Real
Estate, including but not limited to all claims for testing, monitoring,
remediation, damages to person or property, fines, penalties, and including all
reasonable expenses incurred by Sellers with respect to any such claim.

Dated this 9th day of May, 1996.
----------

MICROWARE SYSTEMS CORPORATION MID-AMERICA INVESTMENT CO.
BY /s/ George J. Barry BY /s/ Michael Kuperman
--------------------------------- ---------------------------------
George J. Barry CFO, VP Michael Kuperman, President

STATE OF IOWA )
) SS.
COUNTY OF POLK )

On this __________ day of May, 1996, before me, a Notary Public in and for said
county, personally appeared Kenneth B. Kaplan, to me personally known, who being
by me duly sworn did say that that person is President of said corporation, that
(the seal affixed to said instrument is the seal of said or no seal has been
procured by the said) corporation and that said instrument was signed and sealed
on behalf of the said corporation by authority of its board of directors and the
said Kenneth B. Kaplan acknowledged the execution of said instrument to be the
voluntary act and deed of said corporation by it voluntarily executed.

-----------------------------------
Notary Public in the State of Iowa.
STATE OF IOWA )
) SS.
COUNTY OF POLK )

On this __________ day of May, 1996, before me, a Notary Public in and for said
county, personally appeared Michael Kuperman, to me personally known, who being
by me duly sworn did say that that person is President of said corporation, that
no seal has been procured by the said corporation and that said instrument was
signed on behalf of the said

<PAGE>

corporation by authority of its board of directors and the said Michael Kuperman
acknowledged the execution of said instrument to be the voluntary act and deed
of said corporation by it voluntarily executed.

-----------------------------------
Notary Public in the State of Iowa.

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND IN
ITEM 14(a) OF THE COMPANY'S FORM 10-K FOR THE YEAR-TO-DATE, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1996
<PERIOD-START> APR-01-1995
<PERIOD-END> MAR-31-1996
<CASH> 12,337
<SECURITIES> 0
<RECEIVABLES> 5,312
<ALLOWANCES> 366
<INVENTORY> 39
<CURRENT-ASSETS> 18,277
<PP&E> 8,504
<DEPRECIATION> 4,502
<TOTAL-ASSETS> 24,938
<CURRENT-LIABILITIES> 4,977
<BONDS> 1,188
0
5,001
<COMMON> 13,094
<OTHER-SE> 448
<TOTAL-LIABILITY-AND-EQUITY> 24,938
<SALES> 16,104
<TOTAL-REVENUES> 23,655
<CGS> 2,428
<TOTAL-COSTS> 5,100
<OTHER-EXPENSES> 17,329
<LOSS-PROVISION> 367
<INTEREST-EXPENSE> 151
<INCOME-PRETAX> 1,522
<INCOME-TAX> 146
<INCOME-CONTINUING> 1,376
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,376
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11

</TABLE>